How Does the Russia-Ukraine War Affect Your Crypto Portfolio?
The challenging Russia-Ukraine conflict has had a global impact and caused an enormous amount of suffering. On the ground, Ukrainians and Russians are fighting for their lives, a crumbling economy, political warfare, and are literally struggling to survive.
This conflict has spread from a localized to a worldwide one, with far-reaching implications for everyone, including the global market and crypto investors.
If you’re interested in learning more about the Russia-Ukraine conflict, its risk, and how it will affect the crypto markets and your portfolio, you’ve come to the right place.
What’s Happening Between Ukraine and Russia?
On February 24, Russia initiated an invasion of Ukraine in the regions of Donetsk and Luhansk. As an escalation to the Russo-Ukrainian war that began in 2014 with the annexation of Crimea, this represents the largest military attack in Europe since World War II.
Putting aside the incredibly high human cost, it also has serious economic costs at many levels. According to the Economist Intelligence Unit (EIU), Russia’s invasion of Ukraine will affect the global economy in three main ways: financial sanctions, commodities prices, and supply-chain disruptions, all of which could impact the crypto markets.
Of these three, commodities prices may have the most serious effect since oil prices, those of gas, several base metals (of which Russia is a major producer), and agricultural commodities will soar dramatically.
What’s more, supply chains will be severely disrupted due to financial sanctions, which will complicate trade with Russia and Ukraine. It’s worth noting that specifically regarding energy exports, Russia is the fourth-largest producer in the world.
In sum, all of this creates the perfect storm to keep global inflation at or above the current level of 6%.
How the War is Affecting Both the Ukrainian and Russian Economy
Apart from the trauma and hardship that Russia invading Ukraine inevitably brings, both economies are bound to suffer. Since the start of 2022, the Russian Ruble is down 39%. During that same time period, the Ukrainian Hryvnia has lost ~8% of its value.
Given this dramatic drop, a shift towards cryptocurrency as a store of value is becoming a reality.
According to data from Triple A, Russia is the 3rd biggest country in terms of the number of crypto owners (more than 17 million people), which accounts for nearly 12% of their population. On the other hand, Ukraine is 9th and nearly 13% of Ukrainians own cryptocurrency, accounting for more than 5.5 million people.
As several countries impose sanctions on Russia, such as banning the country from SWIFT and major payment processing companies like Visa, Mastercard, and PayPal, citizens are being forced to turn to digital assets.
Given that private companies are pulling out of Russia, including payment services, and that both countries’ citizens have limited access to cash, this could serve as a catalyst to accelerate the population’s already advanced adoption of cryptocurrency.
Furthermore, although war is never a good thing, this increased acceptance of Bitcoin and its peers could help people realize that there are many cheaper alternatives to sending money than through banks and other traditional financial institutions.
How Has the Crypto Market Reacted?
On Thursday, February 24, both cryptocurrency and stock markets around the world plunged after Russian President Vladimir Putin announced Russia’s invasion of Ukraine.
Bitcoin’s price dropped by more than 7% to below $35,000 following the news, while Ethereum and other altcoins dropped by more than 9%. Overall, the global crypto market cap dropped by around 8.25% to $1.58 trillion.
Millions of Dollars in Crypto Donations
In addition to this negative volatility, since the start of the war, cryptocurrency donations to support the Ukrainian government or NGOs supporting the military efforts or humanitarian causes have absolutely skyrocketed. This is due largely to the fact that the Ukrainian government’s official Twitter account shared wallet addresses for BTC, ETH, and USDT.
As it stands, donations to support Ukraine’s defensive efforts have exceeded $50 million and more than 100,000 transactions.
In case you want to copy and paste…
BTC – 357a3So9CbsNfBBgFYACGvxxS6tMaDoa1P ETH and USDT (ERC-20) – 0x165CD37b4C644C2921454429E7F9358d18A45e14
Since the initial Twitter announcement, Ukraine has received an inflow of other cryptocurrencies, such as Dogecoin, Solana, Binance Coin, and several others. In fact, Polkadot and Kusama founder, Gavin Wood, recently donated $5.8 million worth of DOT to the country.
Several of the world’s largest centralized cryptocurrency exchanges, including Kraken, Coinbase and Binance, have opposed the idea of preemptively banning all Russian users from their platforms. This is in response to many people viewing cryptocurrency as a way to work around the sanctions instituted by President Joe Biden and other Western nations.
However, these three CEXs have agreed to freeze assets of Russian users targeted explicitly by the sanctions. Furthermore, Binance announced that cardholders of sanctioned Russian banks would not be able to use them on their platform.
Brian Armstrong, the CEO of Coinbase, explained his reasoning in a recent thread. He explained that Russians (many of which were against the invasion) used cryptocurrency as a last resort now that their economy was crumbling. According to Armstrong, this ban would hurt these people as well, but he explained that Coinbase would impose one should the government mandate it.
Kraken’s CEO, Jesse Powell, shared a similar sentiment where he explained his company “cannot freeze the accounts of our Russian clients without a legal requirement to do so.”
How Does the Russia-Ukraine Conflict Affect your Crypto Portfolio?
Increased Volatility and Uncertainty
As with any new technology or speculative investment, higher levels of volatility are to be expected with cryptocurrency than with more tried and proven asset classes, such as the stock markets. In fact, the crypto markets are incredibly vulnerable to negative news from a macroeconomic and geopolitical perspective.
In times of conflict, especially one as unique as this, uncertainty is rampant. This means that you should prepare to see a lot of swings to both the upside and downside in your portfolio. It’s unclear exactly what news about the conflict or factors other than the war could cause the market to pump or dump.
For example, after rebounding to almost $45,000 on March 2 in what some people called a “decoupling from the stock market,” Bitcoin’s price dropped to $38,000 on March 6.
This represented a 15% decrease in the span of 4 days in response to news that Russia had bombed Europe’s largest power plant in Ukraine, Zaporizhzhia. Zaporizhzhia is responsible for one-fifth of Ukraine’s power generation.
As always, how cryptocurrency markets will behave is difficult to predict and the onset of the Russia-Ukraine conflict that has consumed media outlets worldwide makes it impossible.
A unique situation in the 21st century
Part of this lack of clarity stems from the fact that the world is in a unique situation. Some of the top global powers are attempting to combat Russia while avoiding escalating the violence or stopping it from spreading to other countries.
Despite there being wars in other countries for the past many years (even now), this conflict is unique for several reasons:
- It’s taking place in Europe
- It involves Russia
- It involves the world powers that constitute the North Atlantic Treaty Organization (NATO) (i.e. Canada, the United States, the United Kingdom, etc.)
Therefore, it will inevitably receive more media coverage, which will impact the international markets. What’s more, it threatens to plunge many countries into economic depression due to supply chain shortages and rising oil and energy prices.
The next few months will be key to understanding what direction the prices of cryptocurrencies and stocks will go.
What Should you Do to Manage your Crypto Portfolio?
Stick to your Strategy
During times of increased volatility, it’s important for cryptocurrency investors to stick to their strategy and not be swayed by their emotions to reduce risks. In the same way that you shouldn’t immediately jump to buy crypto when it’s pumping, you shouldn’t sell when it’s tanking. Avoid panic selling at all costs.
This applies especially to situations when crypto is crashing. In fact, we wrote an entire blog post to provide you with all the information you need to manage your portfolio during a bear market or sudden market downturn.
In our opinion, though, there are a few strategies you could employ to make sure you’re effectively managing your portfolio.
While we already discussed dollar-cost-averaging (DCA) in a recent article, we think it’s worth giving a brief summary of what it is and why it’s one of our favourite strategies for investing.
When you DCA, you buy equal amounts of a particular asset (in this case, cryptocurrency) at different intervals regardless of the price. That way, you reduce the overall impact of volatility and avoid the mistake of buying a large amount all at once, which could be potentially costly due to timing.
“HODL” your Crypto
If you aren’t a fan of DCAing or if you do not have any funds available to execute the strategy, holding your crypto and waiting for its value to increase could be your best bet at this time. This is especially true if you’re treating your crypto as a retirement fund, as many people are.
Similar to how you invest in index funds, avoid looking at your portfolio and simply wait for a future date in the long term. At this point, your investment will hopefully be worth more money than you put in. Stay invested and focus on other things.
Did you know? HODL is both a misspelling of HOLD and also stands for Hold On for Dear Life!
Use the Fear & Greed Index
Since we already covered what the Fear & Greed index is previously, feel free to check out that article that gives you an overview of this tool to get an update and come back to this one.
In the short to medium-term, the Fear and Greed Index can be a useful tool for swing trading. For long-term investors, it can also be great to accumulate more crypto at discounted prices. This can prove especially useful during uncertain times, such as the current Russian invasion of Ukraine.
If you analyze the Fear and Greed Index against the price of Bitcoin, it’s clear that historically, when the market is in an absolute state of fear, these have been some of the best buying opportunities.
For example, on July 21, 2021, Bitcoin dropped to ~$29,780 and the Fear and Greed Index was at 10. If you had bought Bitcoin here, your investment would have nearly doubled in less than 2 months as the crypto reached ~$52,000 in September. If you had waited another two months, you would have more than doubled your earnings since Bitcoin reached ~$67,000 in November.
Coincidentally, these two time periods also saw the Fear and Greed Index reach 79 and 84, respectively, meaning the market was in a state of blind euphoria. As such, this represented the best time to sell.
Fast forward to the past few weeks and we have a similar situation. The Fear and Greed Index and Bitcoin’s price were at their lowest on February 28, the day Russian President Vladimir Putin broke the news about the invasion. The market had a quick recovery to around $44,000, mirroring the Index’s rise to 63, which turned out to be the best time to sell before both values again dropped to the extreme fear territory.
This strategy is one of many that investors can use to capitalize in times of market crisis. However, you don’t have to simply sell when the market reaches a high value on the Index. In fact, you may choose to use it to accumulate the crypto of your choice at a cheaper cost than most. While buying and holding, especially with Bitcoin, may turn out to be a more profitable strategy in the long term, it is a slower approach to increasing your net worth.
Swing trading using metrics such as the Index or other technical indicators may allow you to make some gains much sooner. Like anything in crypto, it does carry risk and a sure thing does not exist.
That said, historically and according to Warren Buffett, being fearful when others are greedy and greedy when others are fearful has shown significant success when it comes to Bitcoin. Time will tell if it is the same during these unprecedented times.
Coin Clarity’s Recommendation
During this horrible geopolitical conflict between Russia and Ukraine, first and foremost, it’s important to remember that people are quite literally dying on the battlefield. As such, we need to be sensitive to that situation.
That said, as an individual, it’s also necessary that you make responsible investing decisions during such uncertain economic times. Although the Russia-Ukraine conflict has dominated headlines over the past weeks, the possibility of the Federal Reserve raising interest rates still exists. Therefore, for the foreseeable future, it’s very possible that we continue to see the choppiness and risk in the markets that we’ve come to expect lately.
In our opinion, the safest approaches you can take to navigate this volatility are to DCA or hold your crypto. If you feel the absolute need to sell, it’s likely that you’ve invested more than you can afford to lose, meaning you should probably reconsider your allocations.
Considering rising energy and gas prices, now would not be a bad time to enter the crypto market and gain new exposure to this asset class to outpace inflation. Thankfully, with Gemini, crypto investors can get up to 8.05% interest on their crypto, which beats this year’s fiat currency inflation reports in Europe and North America.
If you’re concerned about safety, start investing through centralized exchanges like Binance (Binance US), Gate.io, Gemini, Coinbase, and Kraken. These market leaders provide some of the best services and selections of cryptocurrencies on the market, making them an excellent choice to reduce your risk.