Long hailed by its advocates as a safe hedge during uncertain times, Bitcoin’s value has fallen steadily in recent weeks.
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For years, Bitcoin buffs who were questioned by skeptics about the value of the cryptocurrency would respond by saying: just wait.
Wait until inflation hits, and people look to park their savings in a stable digital asset that won’t lose its value. Wait until war breaks out, and authoritarians start seizing assets and imposing capital controls on their citizens. Wait until big banks and tech companies start censoring dissidents for their political views. Then you’ll see why we need a stateless, decentralized, anonymous digital currency.
More than most cryptocurrencies, Bitcoin was seen by many of its libertarian-leaning fans as a kind of doomsday insurance, a form of “digital gold” that would be a source of stability as the world grew more chaotic and unpredictable.
Well, chaos is here. In the United States, inflation is rising at the fastest pace in decades, and the VIX — the so-called fear index used by Wall Street to measure expected volatility in the stock market — has risen more than 80 percent this year. Last month, Canada’s government responded to the threat of a protest convoy of anti-vaccine truckers by threatening to freeze their bank accounts, drawing calls for a type of money that isn’t subject to government seizures. Russia’s invasion of Ukraine was met with brutal sanctions that have tanked the ruble and devastated the Russian economy, and many U.S. companies have pulled out of Russia, making it nearly impossible for its citizens to access their bank accounts, use credit cards or even post on social media.
In other words, this is a perfect storm of economic and geopolitical events that should, theoretically, be great for Bitcoin.
But Bitcoin hasn’t boomed. In fact, even as Wall Street analysts contemplate the possibility of nuclear Armageddon, crypto prices have fallen steadily. Bitcoin prices are down 10 percent in the past month, and Ether, the second most popular crypto coin, is down roughly 15 percent.
Day-to-day usage of cryptocurrencies isn’t picking up the way you’d expect, either. Bitcoin trading volume rose after Russia invaded Ukraine, but it has remained relatively flat since, suggesting that people aren’t rushing to trade their rubles and hryvnia (Ukraine’s currency) for digital currencies. Russian oligarchs don’t appear to be using crypto to evade sanctions en masse, either, despite initial fears that they might.
Granted, crypto has not been totally absent from these events. In Canada, some truckers raised money through crypto donations (while others had their crypto wallets seized as part of the crackdown), and Ukraine’s government has reportedly raised nearly $100 million in crypto donations. And it’s still too early to say, with certainty, that crypto won’t be useful in later stages of the Russian conflict.
But Bitcoin doesn’t seem to be playing a central role in our global unraveling so far. Which raises the obvious question: Why not?
One possibility is that crypto is still too confusing and too difficult for normal people to use, especially during a war. Internet access is spotty in many parts of Ukraine, and reports have suggested that even the country’s elites are struggling to convert their assets into crypto.
Another possibility, popular among skeptics of Bitcoin and other cryptocurrencies, is that Bitcoin is still too volatile to be useful as a hedge against economic and political instability.
“The Bitcoin and crypto communities have been selling a false narrative all these years that Bitcoin is supposed to be a safe haven from the traditional financial markets,” said Jimmy Nguyen, the president of the Bitcoin Association, a cryptocurrency trade group. (His group promotes a Bitcoin spinoff, Bitcoin SV, that sees itself as a more useful version of the cryptocurrency.)
Bitcoin is doomed, Mr. Nguyen argues, because it can be slow and expensive to process transactions, making it less useful for paying for things. “And so a lot of Bitcoin supporters have had to come up with this argument that it’s meant to be a reserve asset,” he said.
Kevin Werbach, a professor of legal studies and business ethics at the Wharton School at the University of Pennsylvania, floated a different theory. Bitcoin’s earliest and most vocal adopters, he said, tended to be libertarians who saw cryptocurrency as a kind of insurance policy against hyperinflation and government corruption. But the more recent price swings in the crypto markets attracted a surge of speculators who viewed Bitcoin and other cryptocurrencies mainly as investments, and cared less about their political implications.
“There’s a tremendous amount of rhetoric around Bitcoin in particular that suggests that it’s predominantly a means of escaping from the government-issued fiat currency system,” he said. “And yet most of the activity, according to basically every rigorous study that’s been done, is predominantly people speculating.”
Another possible explanation for Bitcoin’s underperformance, which was floated by Joe Weisenthal at Bloomberg, is that chaos cuts both ways, and that the same events that could be seen as “good for Bitcoin” in the short term — inflation, sanctions, geopolitical conflict — could also be bad for Bitcoin over the long term, since they could draw the attention of regulators.
“To whatever extent the Canadian trucker story would be seen as bullish for Bitcoin (because it got people thinking about ways of making payments without regulated entities) it’s also bearish for Bitcoin (because it caught the attention of state actors who wanted to push back against such payments),” he wrote.
There are other explanations out there, too. Sam Bankman-Fried, the chief executive of crypto exchange FTX, said on Twitter that while he thought Bitcoin would “do better” in a less stable political and economic environment, he guessed that the discrepancy was partially related to the media’s negative coverage of crypto.
“Headlines have been largely negative independent of actual content the last month in a reaction to statements from the industry, which I think has posed significant headwinds,” he wrote.
But perhaps the most interesting view of crypto’s usefulness during unstable times comes straight from Ukraine’s government.
On Tuesday, I posed a question about crypto to Alex Bornyakov, Ukraine’s deputy minister of digital transformation. Since the Russian invasion, Mr. Bornyakov and his team — led by the country’s digital minister, Mykhailo Fedorov — have been working around the clock to coordinate crypto donations for Ukraine’s army. Tens of millions of dollars’ worth of Bitcoin, Ether and other cryptocurrencies have been sent to these addresses, and the money has been used to buy military supplies, including bulletproof vests and night-vision goggles.
Mr. Bornyakov, who was speaking from an undisclosed location in Ukraine on a video conference hosted by the artificial intelligence company Collective[i], said that one advantage of using crypto to raise money was how quickly the funds could be disbursed.
“In a situation like this, where the national bank is not fully operating, crypto is helping to perform fast transfers, to make it very quick and get results almost immediately,” he said.
But Mr. Bornyakov seemed wary of overstating crypto’s importance to the Ukrainian cause.
“I don’t think crypto is playing a major part,” Mr. Bornyakov said. “But its role is essential in this conflict in terms of helping our army.”