As Russia invaded Ukraine last week, gold surged to its highest in over a year, while bitcoin (BTC) plummeted alongside other risk assets.
Once again, the bellwether crypto asset struggled to demonstrate its gold-like qualities or its ability to hedging inflation capabilities, having recently underperformed in the face of surging inflation.
Crypto cynics and critics have been quick to point out the inconsistencies in bitcoin’s narrative.
However, two crypto industry titans are pushing back, highlighting that critics may have been too quick to judge bitcoin in light of recent geopolitical events.
In research notes this week, both the $1.7 billion crypto asset manager Bitwise and the Asia-based crypto trading house QCP Capital explain how bitcoin is finally showing itself to be an “emerging store of value” in the face of uncertainty.
“From Ukraine collecting over $20 million in crypto donations to resist the invasion, to the Biden administration asking crypto exchanges to ensure they are not being used to evade sanctions, crypto is moving from being a quirky asset class to having a seat at national security discussions,” Matt Hougan, Bitwise chief investment officer, said in a March 2 note.
The war waged by Russia has fundamentally shaken the credibility of the fiat financial system, according to a market update from QCP Capital on March 3. Crypto is establishing itself as a necessary alternative, they said.
The Ukrainian government is soliciting donations in cryptocurrency, having raised over $50 million so far, while Ukrainians have turned to crypto as their own currency has collapsed in value.
Crypto affords anonymity and is outside the control of a single central authority, which means Ukrainians on the ground that fear surveillance and have limited access to bank accounts amid Russia’s invasion have an alternative.
It isn’t a perfect solution, however. It can be difficult to get set up on cryptocurrency systems, such as registering on exchanges and transferring funds between wallets in a normal environment, let alone in a time of crisis and market turmoil.
There’s also fears that Russia might implement cyber attacks on those who use crypto and that Russia itself might even use crypto to evade sanctions, which is the main weapon the West is using against Russia.
With the fiat system being leveraged as a geopolitical tool, individuals will naturally seek out alternatives, the QCP team said.
“The war has instigated a tectonic shift that will form the foundations of a multi-decade crypto bull run in time to come,” they added.
In the last week, QCP said it had witnessed significant buying of spot bitcoin spot and bitcoin call options.
One emerging use case is as a “weekend hedge for event risk” when traditional markets are closed and cryptocurrencies continue to trade. The use case for bitcoin is an inflation hedge is less clear, however.
“It is hard to say if the ‘digital gold’ narrative picks up again longer term but the answer to the question so far is a conclusive ‘no’. Bitcoin cannot be treated as an inflation hedge,” they said.
Bitwise’s Hougan shared a similar perspective. He said it would be hard to say with 100% confidence that bitcoin will be a successful hedge against inflation in the future.
“But if you close your eyes and imagine a world with runaway price increases, financial instability, or one where the dollar loses its role as the world’s sole reserve currency … do you want to own more or less bitcoin?” said Hougan in the note.
Crypto investors are doing themselves a disservice by looking at short-term correlations to make sense of the asset class, Hougan said.
“A short-term spike in correlation does not change bitcoin’s value as a long-term hedge against monetary disorder or geopolitical risk,” Hougan said.
Bitcoin is volatile and future oriented, he added. So in times of stress, investors are likely to sell volatile assets to raise cash.
It’s a time when “all correlations go to one”, Mark Yusko, a bitcoin bull and hedge fund manager, said in a recent interview with Insider.
” out, the correlation of bitcoin to equities is 0.15 for long periods of time,” Yusko said. “Some weeks, some months, it goes higher, but over the long term, it’s still 0.15, and to bonds it’s 0.” The higher the correlation, the more likely two assets are to move in lockstep with each other.
Hougan instead urges investors to look at bitcoin in the context of years, rather than weeks or even quarters.
“Through this lens, bitcoin has done remarkably well, posting a 4,000,000%+ return over the past decade,” Hougan said.
But there are still structural challenges. Crypto is yet to reach a point where it permeates the mainstream so much that individuals can quickly shift from fiat to digital currency.
Cory Klippsten, CEO of Swan Bitcoin, told Insider he’s attracted to bitcoin because it’s “a hedge against the entire financial system.” But he highlights how in crisis scenarios, like Russia’s invasion of Ukraine, it is often too late to be used as a hedge against the system.
“You need your ducks in a row long before the crisis actually hits,” Klippsten said. “And I think we see evidence of the same thing playing out with these lines outside the ATMs all over Ukraine.”
“If you weren’t prepared before, it’s impossible to catch up during a crisis,” he added. “So the time to prepare is long before the crisis comes.”
However, for those who were already set up the network showed resilience over centralized peers, Hougan said.
“No one can forecast what path prices will follow from here, but many—including Bitwise—see the industry as sitting on the verge of another quantum leap, as it did during the Covid-19 crisis,” Hougan said.
“Although this might not be the most comfortable time to invest in crypto, investors who allocated during such transitions in the past were ultimately vindicated,” he added.
While the long-term outlook is overall bullish, QCP cautions investors to proceed with caution, given there are some significant macro events in the short term, from US consumer inflation data on March 10 to the rate decision on March 16.
“We maintain the view that there will be some downside risk as we head into the 2nd half of this year as macro markets deleverage on the back of Fed tightening and balance sheet reductions,” they said.
“However, this coming dip could be the best opportunity to build up a structural long position in crypto,” they added.
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