7 Potential Impacts of the Ukraine War on Cryptocurrency: Dangers, Hopes, and Solutions

Written by:Tascha

Compiled by: TechFlow Intern

Will the war in Ukraine be bullish or bearish for cryptocurrencies? Here are seven potential impacts, ranked from short-term to long-term.

1. Collateral damage from a liquidity crunch

Financial sanctions mean that Russia’s $1.2 trillion in foreign liabilities (half of which is portfolio debt/equity) need to be written off the books of foreign creditors and investors, as well as accounts receivable owed to Russia.

Creditors/exporters/investors with ties to Russia will need more liquidity from the market. This, combined with higher risk aversion, means that financial conditions, which were already tighter than before the pandemic, will continue to tighten.

Similar factors also lead to a rise in the value of the U.S. dollar, which means a fall in cryptocurrency prices .

Of course, all of this is short-term for risk assets, including Web3.

2. Smart money will move

Russia is a big exporter of energy, grains and metals. Everyone can see that cutting Russia off from world markets would mean a huge opportunity for commodities.

For example, 20% of the world's supply of palladium would disappear.

The palladium futures market has pushed prices up 25% since a week ago.

Expect FinTwit to switch from blockchain experts to agriculture and metals experts soon.

Investor funds will move from tech stocks and cryptocurrencies to commodities, and although we saw a 2-day surge in BTC prices in the past week, this was probably caused by short-term capital flight from Russia and Ukraine, and I don’t think it will last.

3. Fed’s response

The U.S. economy is booming, but rising commodity prices will add to the pain of inflation, which could feed back into the U.S. later this year if it triggers a global recession through its impact on commodity-importing countries such as Asia and Europe.

The Fed still has no reason not to raise interest rates, but if financial conditions continue to tighten and recession risks increase, QT may become increasingly difficult to achieve.

It is not so much a QT as it is some type of price control that is directly targeted at the increase in food and fuel costs. No QT this year would be positive for cryptocurrencies and stocks in the second half of the year, but it is too early to count on this.

4. A recession is coming

It would be bullish for crypto and other exponential growth assets if a war-induced recession occurred within 6-12 months, similar to the COVID-19 recession, especially if it would force the Fed to resume tightening.

5. Free marketing for decentralization

Media and financial sanctions against Russia have been coming fast and furious. To my surprise, even Telegram banned a Russian news channel I follow.

Generally speaking, I have no value judgment on regulation, nor do I oppose it. Censorship is a complex issue that depends on the situation. Crypto-libertarians tend to be naive about this.

But over the past week, centralized entities like Infura and Circle have publicized their sensitivity to regulatory regimes, which has undoubtedly strengthened the public credibility of their decentralized counterparts and demonstrated the benefits of decentralization.

6. More compliant and mature exchanges

Cryptocurrency has been struggling to shake off its bad reputation as a financial escape vehicle for criminals and drug lords. Whether you think that perception is justified or not, the facts are there.

In the past, many exchanges have actively shied away from regulatory scrutiny. In order for cryptocurrencies to gain mainstream acceptance, exchanges need to grow up. They need to act like responsible financial industry players and cooperate with the sociopolitical agenda of the jurisdictions in which they operate.

This war has given exchanges an important opportunity to prove that cryptocurrencies are not enemies of the state. Most large exchanges have stated that they comply with sanctions rules, which is bullish for the industry in the long run.

7. Foreshadowing of the next bull market

Although less obvious, Ukraine is using blockchain for war financing, which is a more favorable event for cryptocurrency adoption than El Salvador’s use of Bitcoin as legal tender.

El Salvador is a poorly governed, predatory state, and its adoption of an extremely volatile asset as its official currency is a questionable policy choice at best. Both simply reinforce the negative mainstream view of cryptocurrencies.

In contrast, Ukraine is a regime with more legitimacy to the West, and the war has earned it widespread sympathy from the Western public. Ukraine's use of cryptocurrency for international fundraising helps demonstrate the advantages of blockchain over traditional currencies in terms of fast settlement and resilient transaction processing.

While the amount of crypto money raised in Ukraine is minuscule compared to what came from traditional financial channels, it put blockchain on the map as a legitimate challenger to traditional banking rails. This had a bigger impact on public consciousness than 100 Super Bowl ads, and it was free.

Conclusion: The cryptocurrency market will continue to fluctuate and may remain in a bear market in the future. But in the long run, the Ukrainian war will be a major event and a purely positive event for the growth of applications and the market.

Coping strategies

We may see more external shocks this year that shake the market like what happened in the past 10 days. You need to keep a close eye on your portfolio and stay flexible. Here are some options:

• 1) Long-term holding and staking

• 2) Trade around volatility and strictly control risks

• 3) Temporarily allocate funds to the commodity market and then return to cryptocurrencies after the sell-off occurs.

1) is the least ideal in this environment, but takes the least effort and has the fewest mistakes. If you are familiar with the market, have excellent trading skills and have the time to manage trades, choose 2) or 3) (or both). If you are a pure speculator, then use all three of these, and perhaps some other operations.