What Does the Russian Invasion of Ukraine Mean for Bitcoin?

The crypto-economics of a misguided move

(Written on the morning of invasion)

Waking up this morning in the UK I was as shocked as everyone else that Putin had “pressed the button” on what appears to be a full out assault on Ukraine after weeks of steadfastly — and publicly — denying that he would do.

I was angry. Furious actually. Sure, the signs were there, but to really do it seemed like the move of a madman. People will now die for an ideology that is seemingly based on some form of rose tinted nostalgia of a former Soviet empire.

It is, in my view, absolutely inexcusable. This is not worth one single human life. Not one. From either side.

Putin’s speech was terrifying, drawing on all the classic lines and mannerisms of dictators who have come before him in history who think they are untouchable. None were, though some succeeded for a time.

He has few, if any, allies on the international stage and it is a very high stakes gamble. Perhaps his success, if you can call it that, in Crimea in 2014 has give him confidence that he can actually pull this off.

Much could be written about the causes, motives and the counter argument of Putin’s issue with his country’s western border security, but most of it makes little sense anyway.

After all, even if Putin is 100% successful in his aims to control Ukraine, he will still have a western border facing NATO forces which will, of course, be mobilized to reinforce that border more than at any time in history, effectively creating a new iron curtain.

We end up back at square one. Will Moscow then start pushing back against Moldova, Romania and Poland for example? Where does it end? When is a border not a border?

However, this is not the main thrust of this article, other than making the point that I condemn it as much as everyone else does. It is being written just hours after the invasion began and there’s still much we don’t know, but we do know the world has changed since the war of 1939–1945.

The way this war will be fought — and let’s be clear it IS a war — will not be the same as any war prior to this one.

Follow the money

Wars are incredibly expensive. History is littered with examples of the actual or effective bankruptcy of any country involved in one, whether aggressor or defender. Reparations can be a crippling drain on a country’s economy and run for decades.

Modern wars — that is men, equipment and all the supporting infrastructure required — are usually financed by expanding the money supply. That may take different forms, of course, but the basic premise is universal. It is one “advantage” of a fiat based monetary system. Need more money? Just hit the print button.

It is well known that Putin has been reducing his country’s dependence on the dollar, acquiring gold and generally maneuvering his economy to be less sensitive to international trade fluctuations for some time. Perhaps this is why, since this operation has clearly been a long time in the making. The military and all its accompanying entourage appears incredibly well prepared. and the first explosions came within minutes of Putin’s speech.

But, economically speaking, this cannot be seen as anything other than disastrous for the Russian people. Within hours of the attack, the Russian Ruble fell to a new all time low. It had never really covered from the battering it took in the 2014 annexation of Crimea when it halved in value in a matter or months.

This act will add substantial pressure on international FOREX markets. Who in their right mind would want to hold Rubles when it is all but certain Putin will be producing more to fund his war machine, let alone the other destabilizing factors it will bring?

Meanwhile the Ukrainian Hryvnia has, so far, held steady, despite reported panic withdrawals in large numbers from ATMs across the country. This is surely in part due to the declaration of martial law in Ukraine, where the central bank suspended the country’s currency markets, stopped the circulation of securities and limited those cash withdrawals.

Russian stocks were also hammered with today, February 24th, seeing the largest drop in history for the MOEX (Moscow Exchange) down, at one point by 50%. This effectively wiped out $150bn of value from the country within minutes.

Wars, as I say, are expensive, and in more ways that one.

While this will be no more than an “on paper” inconvenience for the Russian leader, for ordinary Russians it could be devastating. As it is, there appears to be little support in general within the country for Putin’s actions, hitting its citizens with financial hardship is certainly not going to help in that regard.

All this, of course, before what will certainly be a unified and powerful series economic sanctions are put in place from NATO and its allies. At the very least, this will be an economic mess.

Sadly, in these days of interconnected supply chains and monetary systems, the fallout will not be contained to the aggressor nation.

Even as aid will likely pour in to Ukraine from its global allies as fast as it dries up for Russia, the reality is that normal life, at least for now, is over. Business will close, supply chains will break, livelihoods will be lost with the knock-on effect that this has.

All nations in the area are exposed. Even nations hundreds, even thousands, of miles away face the reality of supply pressures and tit-for-tat sanctions back from Russia.

Around 40% of Europe’s natural gas, for example, is supplied by pipeline from Russia. It also produces most of the world's palladium, used in various modern day industrial applications. It seems inconceivable that these supplies will continue as is. What does that mean for economies still weak from Covid at a time when energy is a already a huge inflationary pressure? Nothing good, that’s for sure.

No, far from being a conflict in a country far away from us that may interest and appall us on television, this will affect everyone in some way at some point.

So, economically speaking, what happens now?

Gold, commodities and stocks

Predictably, there was an immediate and significant global sell off of assets. This, of course, is a normal reaction in times of uncertainty. Part of this is panic selling to rotate into more defensive positions or cash and part of this is recognition that stocks have been trading at excessively high multiples of earnings for some time and those good times are almost certainly at an end.

There are few exceptions to the sell off and the winners are as predictable as the losers; gold, oil, silver and a few others.

As a large producer of oil, Russia’s actions have an effect. Although it may seem the country may benefit from higher prices as a result (currently up 7.5%), the reality is that sanctions are almost certain to make that a moot point. Supply will no doubt drop. Prices will rise further and speculators have already spotted this.

Gold has not performed well recently, especially over the last decade or so, but in times of extreme uncertainty, it has the historical clout to be the de facto safe haven of the day. At time of writing, it has jumped almost 3% to $1975.

Holding gold directly, however, is not without risk. Historically it has been almost routinely confiscated by governments in time of war or hardship and, since we know both of these are coming in some parts of the world, it stands to reason that the propensity for this to happen in some form or another has just increased.

For now, however, this seems to be a solid and defensive play as cash rotates from riskier assets to this one and, to a lesser extent, other precious metals. Silver, for example is also up 3% at time of writing.

A Russian’s view

36 hours after the invasion I contacted a Russian colleague of mine, Maxim Matrenitski, with whom I had spent some time at our mining operation in Siberia just a few months ago. I wanted to know what a Russian thought of this invasion.

The author visiting the Kremlin, Moscow, at the end of 2021 on the way back from Siberia. Revisiting now seems like an impossibility

The result was an incredible 55 minute interview recorded via Zoom that gave me a real insight into what was happening inside the borders while the world was focused on Ukraine.

We covered what Russians thought, what the sanctions would mean, what it might mean for business and of course, what we thought this might mean for Bitcoin.

Which brings me to the main point: What is happening, and what could happen, with Bitcoin?

Bitcoin

Those of us who have really taken the time to understand it already know the power this asset has in terms of being based entirely outside of the existing financial system. This should, in theory as well as practice, be Bitcoin’s time to shine.

It is also unstoppable, unconfiscatable (when properly stored) and incredibly resilient, running, as it does, on the world’s most secure network. It is impenetrable even to Russia’s mighty cyber powers.

It is a way for those who are unwillingly caught up in this thing to move and protect their wealth in a way that has never been possible before, as I wrote about in detail previously.

While banking systems come under pressure or suffer Russian cyber attacks, Bitcoin can continue to operate entirely unaffected by any of it. Just as war is now fought on the cyber front and through disinformation and propaganda as much as it by tanks and bombs, Bitcoin — and blockchain — is a way through it. This much is certain.

However, in relative terms, we are still a minority, a mere faction of a percent of the world’s population. It is not enough to solidify Bitcoin’s position as a hedge or any form of insurance. It is simply too young. It is still used too much as a speculative vehicle simply to generate fiat.

So, for now, Bitcoin is classed as a “risk on” asset and dumped with everything else in a general sale.

But I wonder what would have happened if Bitcoin had been five or ten years older? I suspect we’d be looking at a very different outcome.

That said, there is no question that the general education of Bitcoin has been increasing exponentially recently, especially with the events in Canada highlighting just how important an independent financial system actually is.

While we are only in the first few hours of an unprovoked large scale attack on a peaceful nation by a foreign aggressor, it’s entirely possible that this sorry and entirely unnecessary event may have much larger ramifications for a global monetary system that is already under extreme pressure.

Perhaps it will ultimately accelerate fiat’s inevitable end. Perhaps it will irrevocably and publicly showcase the importance of a hard money system that sits entirely outside of our human weaknesses.

But if nothing else, it would make war very, very expensive.

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Disclosure: The author of this opinion piece has been heavily involved with bitcoin for several years and holds a substantial cryptocurrency portfolio, including bitcoin. He also has a mining operation running the SHA-256 algorithm based in Siberia and is a published author on the subject of promoting the understanding of cryptocurrency. Jason is an analyst at Quantum Economics and consultant to Luno.

Disclaimer: This content is for educational purposes only. It does not constitute trading advice. Past performance does not indicate future results. Do not invest more than you can afford to lose. The author of this article may hold assets mentioned in the piece.

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