How Global Uncertainty Turned Many Towards Crypto
On February 24th, news broke of a territorial incursion by Russian forces across the Ukrainian border. The effects of this political decision reverberated throughout the business world — including, for a short time, in crypto markets. The fear gauge volatility index of the traditional stock markets jumped from 7% to 31%, and the value of Bitcoin fell from $37k to $34k. However, such losses were not sustained, with many markets bouncing back before the close of play of that same day. Which leads to the question, what makes such commodities thrive amongst global uncertainty?
Fundamentals — Supply vs Demand
The first thing to highlight is how supply and demand is fundamental to the nature of crypto, and this has a direct impact on its value. Notably too, it is undoubtable that these factors will be impacted by macro-external events that occur, both in business and in politics. Generally, as the crypto market tends to be a bit less mature than its stock counterpart, what can be felt on the stock market can be felt even more heavily in crypto.
Throw into the mix the fact that the crypto market has nowhere near as many users as the stock market, and you have an even further contributing factor to the volatility of the market.
As a rule, when an event happens that creates uncertainty in the world, it triggers more selling orders than usual. Naturally, people want to cash in on their commodity and avoid holding something that is falling in value. The ‘fear’ index this creates does indeed drive down value, as the commodity is not as in demand as before, and it needs to be sold at a cheaper price to make it more appealing to traders.
Appealing is a key word here, that plays a key role in helping us understand why, in a time of huge uncertainty, crypto markets have been able to bounce back strongly and ride the geopolitical storm.
I mentioned the word ‘appealing’, and how it is a vital thing to consider when analyzing crypto markets. To say that crypto’s appeal, as we sometimes see with some other traditional stocks, reduces the more unstable the geopolitical landscape becomes is not entirely accurate — in fact, it’s quite the opposite.
Crypto’s appeal in the face of uncertainty derives from the concept of autonomy. That is, the level of self-determination that people can have over their own assets has a direct correlation with how appealing they remain, even in uncertain times. When the world is running smoothly, financial assets that sit in a centralized institution like a bank remain stable and accessible, and the fact that autonomy is in the hands of the bank is not something that we spend too long thinking about. In instability, however, the vulnerability of this system can be demonstrated significantly — especially in more autonomous political systems.
One factor that can contribute to this vulnerability is access. When political systems become unstable, so does access to centralized institutions that hold a lot of power. They may not have the direct ability to take control of assets sat within a bank, however they can certainly steer the ship. That’s why, in times of political uncertainty, we are starting to see demand for cryptocurrencies increase quite significantly.
In Times Of Crisis
At the beginning of March, the Russian Ruble was worth less than a Dogecoin. While prices dropped initially upon Russia’s invasion of Ukraine, they eventually rose back up as demand surged in both countries. Representatives of the Ukrainian government turned to alternative technologies, even requesting donations from well-doers in cryptocurrencies — including Dogecoin itself. In 2022, a meme coin that had previously been considered as a ‘joke’ in some quarters was considered as a credible source of funding in a military crisis. Crypto has come a long way.
Overall, we can see that as instability unfolds in corners of the globe, the demand for resources that take autonomy away from centralized institutions and back into the hands of the individual increases. Before, it was just a theory — now, the crypto community has living proof that it is being put into practice.