How Russia-Ukrainian Tensions Has Impacted the Crypto Market

• Bitcoin (BTC) traded lower over the weekend after buyers were unable to break above the $40,000 price level. Immediate support is at $38,000, which could stabilize the pullback. Russia-Ukraine war affects commodities supply market, causing commodities price to rise and creating inflationary risks, triggering the market go downward.
• President Joe Biden is expected to sign a long-awaited executive order Wednesday directing the Justice Department, Treasury Department and other agencies to study the legal and economic implications of creating a U.S. central bank digital currency, a source familiar with the situation said Monday. “Bitcoin could be a potential safe haven for Russian oligarchs to avoid sanctions, as there will be no censorship on the Bitcoin network and cryptocurrencies transactions. Cryptocurrency can serve as a powerful store of value for most assets that do not require liquidity. ” said Noise Zhou, senior analyst of LD Capital.
• After the invasion of Russiaon on on Feb 24, Bitcoin trading volume in Russian rubles increased by 259% from the previous day, or about $13.1 million, according to data from cryptocompare. In the wake of this battle, cryptoassets may be emerging as the currency of choice in geopolitically risky regions, but cryptoassets appear to play other important roles.
• As of March 4, the Ukrainian government had accepted more than 108,000 digital donations through cryptocurrencies, worth about $57.7 million, according to the wallet address posted by the Ukrainian government on Twitter for receiving crypto-asset donations. Digital assets used for donations include Bitcoin, Ethereum, stablecoins, NFT crowdfunding and other currencies. It includes a $5.8 million donation from the founder of Polkadot Gavin Wood, and CryptoPunk NFTs worth over $ 200,000.
• Just after Beijing Winter Olympic, Ukrainian President Volodymyr Zelensky recently reported that sources had warned him of an imminent attack from the Russian forces that had recently mobilized along the nation’s borders. The information mentioned mid-February as the most likely time for an offensive, heightening anxieties across the globe.
• Amid the growing tensions between the two old rivals, US President Biden has threatened to shut down the Nord Stream 2 pipeline in retaliation for any belligerent action on behalf of the Kremlin. This 750-mile-long pipeline connecting Russian gas to Germany is not yet up and running, but Moscow currently supplies around 40% of Europe’s national gas.
• According to GlobalBlock analyst Marcus Sotiriou, this gives Russia considerable leverage in negotiations. “The [Nord stream 1] pipeline supplies a large portion of Europe’s natural gas, so if it were to be shut down, that could cause oil prices to climb, making inflation a bigger problem.” Indeed, high inflation is already causing a plethora of problems across the globe. In the US, record inflation is the reason behind the Fed raising interest rates. Regardless of intentions, there are already signs that such an aggressive monetary policy could lead to slower growth and a potential recession.
• On Feb 28th, crude oil prices rose to nearly $100 a barrel, while European natural gas prices surged 5%, adding to mounting concerns about inflation’s overall impact. Meanwhile, risk assets such as cryptocurrencies and tech stocks are suffering amid ongoing investor uncertainty.
• US stocks were the first to fall, and they continue to waver along with news of the Ukrainian situation. In Europe, 98% of the stocks in the Stoxx 600 fell. Now, the latest news shows that cryptocurrencies are falling across the board. In fact, more than $65 billion has been wiped off the global cryptocurrency market cap in the past 24 hours, with Bitcoin and Ethereum both seeing significant declines on Monday. Bitcoin fell a total of 0.8% to around $42,000, while Ethereum fell 2.2% to $2,877 . In fact, Ethereum is down around 7% from the past week, while Bitcoin is down roughly 1.1%.
• LD analyst Noice Zhou was among the first to express concerns about the overall market in 2022, claiming that crypto was in for a very turbulent year. “Although there isn’t a lot of history to refer to, Bitcoin and other major coins like Ethereum are usually not the best performing assets after major bull markets,” said Zhou. “Historically, Bitcoin has only experienced about four major bull markets: 2011, 2013, 2017, and 2020, all of which happened in an environment of rising PMIs, that is, an acceleration of the economy.”
• Unfortunately, many other analysts agree that Bitcoin will likely end up the captive of economic growth and inflation, especially as macroeconomics start to have a more pronounced impact. Moreover, it’s theorized that tighter monetary policy on liquidity coupled with a potential slowdown in economic growth could negatively impact notoriously-volatile Bitcoin even further. So regardless of how bullish investors might be on Bitcoin in the long run, these macro factors simply cannot be ignored.

US Financial Action and Bitcoin Price Volatility

• Compounding matters even further, the US Treasury yield curve also issued a stark warning for crypto enthusiasts. Bitcoin typically exhibits a strong positive correlation with this indicator, which is frequently used as a barometer of investors’ expectations for future economic growth and inflation. Bitcoin performed well during the steepening of the curve but became weaker as the curve flattened.
• For most of 2021, you could stay on the right side of Bitcoin trading if you could get the yield curve slope right. Now, as it approaches another leveling-off period, investors are wondering if Bitcoin will follow this trend or break it. Against a backdrop of slowing growth and deflation, the price of Bitcoin could decline significantly, much like how the stock market tends to underperform during times of economic slowdown.
• If we look at volatility through crypto’s history, we can attempt to model Bitcoin’s potential price action. For example, during 2018 Bitcoin’s spring rally, volatility spiked, leading to successive highs falling to 110% from 190%. If we model the expected annual movement Using these previous volatility highs and the $47,000 Bitcoin spot reference price, we can get a theoretical trading range for next year.
• Due to Bitcoin’s highly speculative nature, there is often a positive correlation between the spot price and underlying volatility. As Bitcoin continues to mature as an investable asset, this will relationship will likely begin to diminish. For now, it is well within the realm of possibility for us to see volatility levels above 100% yet again.
• To calculate the standard deviation of the expected Bitcoin price range over any time period, we simply enter the volatility into the following formula: P*V*(SQRT (n/360), P=price, V = volatility, n = number of days, Forward SQRT = square root
• If we apply this formula to Q1 of 2022 while assuming a volatility of 90%, we get a statistical range of +/- $21,910. This means that if Bitcoin’s volatility remains at these levels, it’s equally possible that we will see a rise to $68,000 or a fall to $25,000. While wide, this is well within the parameters established by Bitcoin’s trading history.

The Role of Ethereum, DeFi, and NFTs in 2022

• 2021 saw a dramatic rise in the price of Ethereum, which was largely supported by the development of new decentralized applications such as DeFi. Suddenly, unmanaged decentralized finance could be used by investors all over the world. Indeed, the transaction volume on DeFi, which was actually developed on Ethereum, created a positive correlation that sent the token’s price soaring.
• If DeFi and NFTs continue to develop, the use of Ethereum will continue to increase. In fact, Ryan Watkins, an analyst of crypto-asset analysis firm Mesari, recently stated that Ethereum could actually overtake Bitcoin as the most valuable cryptocurrency. Tom Higgens, The CEO of the asset management platform “Gold-I,” agreed, stating that a shift to proof of stake will lead to a rally that could put Bitcoin to shame.
• It’s safe to say that many experts have high hopes for the future of Ethereum. In the Defi sector, the current total value has exceeded $100 billion, with most of that money being allocated to lending platforms and decentralized exchanges. However, it’s also worth noting that most DeFi tokens have underperformed when compared to Ethereum, to say nothing of the related security concerns.
• Indeed, in 2021, the amount of funds stolen from DeFi increased eightfold from the previous year, totaling $610 million across some 50 attacks. Though there’s no doubt that regulatory pressure will continue to reshape DeFi, it’s also foreseeable that more and more applications will impose KYC requirements in an effort to increase user trust.
• Still, institutions are eager to deploy funds into the DeFi space. Unfortunately, they face numerous obstacles due to regulatory uncertainty (KYC/AML, securities laws, etc.). In response, some protocols have formed the concept of “permissioned DeFi,” which can provide access while meeting existing compliance requirements. Of course, many critics argue that such measures defeat the purpose of DeFi by eliminating decentralization.
• Taking all of this into account, it remains a fact of global finance that some applications require trust in certain parties, such as unsecured loan borrowers, RWA tokenized custodians, etc. The current sentiment is that open finance should not just be decentralized, but should also provide users with options and transparency.
• The hope is that these projects can receive funding from institutional giants that currently have no exposure to DeFi. Indeed, some existing decentralized protocols are already branching out for institutional clients, such as Aave Arc and Compound Treasury.
• The bulk of protocols, however, will remain permissionless. This is to be expected when most developers continue to remain anonymous. Such a decision will speed up the process of complete decentralization and help the industry avoid regulatory scrutiny. Simultaneously, the threat of restricted access will accelerate the development and adoption of a privacy-enhanced DeFi ecosystem powered by zero-knowledge technology.
• At the moment, many so-called “decentralized applications” still rely on centralized components like user interfaces and proprietary routing optimization algorithms. Of course, as Regulatory pressure increases, everyone involved will be forced to take sides. Where some protocols will simply comply with KYC processes or restrict users in certain jurisdictions, while others will remain anonymous and give up control over front-end and smart contracts to achieve decentralization.

Last, But Not Least, the Metaverse

• As you probably know, the “Metaverse” is a virtual platform through which people can collaborate and trade all manner of assets. What you may not know is that such digital economies would be unimaginable without NFTs and blockchain-based infrastructure. Indeed, 2021 proved to be the turning point for “GameFi,” which allows gamers to earn digital assets for their in-game efforts.
• Axie Infinity and the Ronin sidechain enabled the throughput needed to allow 1 million active players to participate in the NFT-powered game as of August 2021. This has ended up becoming a major source of income for many people, especially in struggling economies like the Philippines or Vietnam.
• Of course, both Microsoft and Facebook have announced that they are building their own approach to the digital world, with the latter actually renaming their company “Meta” in expectation of the coming windfall. However, one must assume that these well-established internet giants will most likely develop a centralized and partially closed system. This will make it difficult — if not outright impossible — for users to share value between digital ecosystems.
• Of course, such a setup is diametrically opposed to the very philosophy guiding Web3, which until now has been focused on using blockchain technology to empower individuals with well-defined property rights and freedom of movement.
• It’s still exciting to be watching the dawn of the Metaverse, something that has been theorized and fictionalized for more than 50 years. After all, this brave new world could spur an unprecedented wave of adoption once seamless value transfer across different cryptocurrency worlds is achieved. Along the way, NFTs and blockchain-based gaming economies will only help to provide winds for the Metaverse’s sails. Eventually, we will see an interconnected economy the likes of which we couldn’t have thought possible only a few years ago. It all sounds like it’s a long way off, but 2022 still has a lot of cards to play. But it seems that they are — in error — talking about the shutdown of Nord Stream 1, which Russia could do in retaliation for Nord Stream 2 being cancelled.

Disclaimer

Views expressed below are the analytical views of the LD Capital. They should not form the basis for making investment decisions nor be construed as a recommendation or advice to engage in investment transactions. All information in this report comes from publicly disclosed sources. The viewpoints and forecasts only represent analysis and judgment as of the release date, and does not stay valid permanently.

LD Capital is a leading crypto fund who is active in primary and secondary markets, whose sub-funds include dedicated eco fund, FoF, hedge fund and Meta Fund.

LD Capital has a professional global team with deep industrial resources, and focus on develivering superior post-investment services to enhance project value growth, and specializes in long-term value and ecosystem investment.

LD Capital has successively discovered and invested more than 300 companies in Infra/Protocol/Dapp/Privacy/Metaverse/Layer2/DeFi/DAO/GameFi fields since 2016.

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