Bitcoin Builds Momentum as War Inflates Demand. But Cryptos Face a Catch-22.
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War in Europe appears to be pumping up Bitcoin and the broader cryptocurrency market. Whether it lasts will depend on demand materializing after the crisis winds down—and how regulatory pressures play out.
Bitcoin was slumping a bit Thursday, down 4% in 24 hours, to around $42,400. But it has staged a remarkable rally, gaining around 20% from $35,000 when Russian forces attacked Ukraine last week.
The broader crypto market has also clawed back some losses from earlier in the year. Ether, the second largest crypto, is up 20% in the last week to $2,830. And there seems to be strong demand for stablecoins—tokens aiming to maintain a fixed value with backing from reserve assets. Luna, a token backing “algorithmic” stablecoins on the Terra blockchain network, has rocketed 80% since the invasion, pushing its market cap to $34 billion in a sign of demand for new crypto dollars.
Bitcoin has now breached a few technical resistance levels, or barriers to further gains. The crypto has crossed above its 50-day moving average for the first time since last November, according to data from Fairlead Strategies. Its next hurdle would be crossing back above the 200-day moving average around $48,000, which may set it up for more gains.
“The breakout…puts the next major hurdle on the chart in the $50,000 to 51,000 range,” said Katie Stockton, founder and managing partner of Fairlead, in a note on Thursday.
The catalyst appears to be renewed hopes that crypto will find real-world uses—beyond being something to trade—as an alternative to sovereign currencies. War and geopolitical instability in Europe may be fueling demand for cryptos as government-backed currencies like the Russian ruble collapse, the thinking goes. And even when the crisis dissipates, there may be more structural demand for crypto as global digital collateral.
“The world was finally forced to acknowledge Bitcoin as a force for financial freedom and censorship resistance,” said Fundstrat Global’s head of digital asset strategy Sean Farrell, in a commentary on Thursday.
Bitcoin is also managing to rally while stocks take a beating—decoupling from a close correlation between the two asset classes before the crisis in Ukraine. Despite being five times more volatile than stocks—over a 260-day average—Bitcoin was down less than half the 10% decline of the
S&P 500
through the first two months of 2022, notes Bloomberg Intelligence commodities strategist Mike McGlone.
He argues that Bitcoin and other cryptos could be the digital commodities for a new era, beating returns for traditional commodities like oil. A surge in oil prices will ultimately spur more production, increasing supply and pushing the price back down. He sees a 13% surplus in global oil supplies over consumption in 2023 and expects prices to trend down once this crisis dissipates.
“The bottom line for most commodities is that higher prices thwart demand and increase supply, while the opposite may be true in Bitcoin,” he writes. “Competition has inspired over 17,000 crypto wannabes, but Bitcoin, Ethereum and crypto dollars top the enduring survivors list.”
Yet the bull case for Bitcoin hinges on global adoption for real-world uses—as a store of value and digital asset that could capture significant market share in institutional portfolios, corporate treasuries, and individual accounts. It also assumes a global regulatory climate that allows crypto to coexist harmoniously with currencies, stocks, bonds, and other securities.
None of that is assured, especially as governments grow concerned that crypto may be used to evade sanctions and allow governments, companies, and individuals to bypass the international monetary system.
Indeed, crypto faces a Catch-22. The more it takes off, the more its anonymity and borderless features may threaten sovereign financial controls, fueling measures to ban, tax, and heavily restrict its use.
The Biden administration, for one, is preparing an executive order on crypto, aiming to coordinate policy across federal agencies and departments. Federal government measures to regulate stablecoins may also be in the works. And nonfungible tokens, or NFTs, may be the next crypto category to come under scrutiny amid reports that the Securities and Exchange Commission is now probing NFTs as potentially unregulated securities.
Crypto is also coming under more scrutiny abroad as the Russia crisis puts it under the spotlight. This week, European Central Bank President Christine Lagarde said the European Union should quickly pass a regulatory framework for crypto, partly so that Russia can’t use it to evade sanctions.
None of this means cryptocurrencies can’t thrive amid far tighter global regulations. It just may not look nearly as “permissionless” as its proponents would like.
Write to Daren Fonda at daren.fonda@barrons.com