As the Ukraine crisis highlights Bitcoin as a risky asset, volatility could remain

As the Ukraine crisis highlights Bitcoin as a risky asset, volatility could remain

As the crisis in Ukraine roils global stock and digital asset markets, Bitcoin and other cryptocurrencies are increasingly seen as risk assets in the eyes of institutional traders.

Recent shocks have hampered Bitcoin's premise as a digital gold or store of value - its place as a pioneering investment in turbulent times has also been called into question.

Bitcoin and other cryptocurrencies, including Ether, plunged more than 10% on Thursday as Russia's invasion of Ukraine began, before recovering to post modest gains on the day. Digital assets also continued to rise on Friday as traders appeared to shake off the impact of the invasion's medium- and longer-term impact.

Kevin Kang, co-founder of digital asset hedge fund firm BKCoin Capital, attributed the recovery to “short covering and stocks erasing previous losses.”

In fact, Bitcoin has been trading almost parallel to stocks recently. According to Rance Masheck, CEO of the trading platform, major traders have been wary of the correlation and have largely stayed away from recent market moves iVestPlus.

“Overall, [crypto] moved with the way the US market moved,” Mascheck said. “Some of that came back, just like the market came back, but the big players aren't jumping in or getting out.”

iVest data shows a roughly 50% decline in Bitcoin trades above $100,000 compared to the same time last week - plus the company saw a modest $19 million in net outflow, suggesting few directional bets.

Bitcoin rose 9.6% in the last 24 hours as of midday Friday, while showing a weekly decline of -2.9%. Ether, on the other hand, rose 10.7% in the last day, paring week-long losses to -5.6%.

Volatility shows few signs of slowing.

“Historically, the day of the invasion marked a local low point in the market as uncertainty eased, but there is a lot of talk about how Russia may just be getting started and invading Poland and other close NATO nations, which will put the U.S. in limbo,” Kang said. "There is still a lot of uncertainty in the market. We expect volatility to continue."

Brian Brooks, CEO of Bitcoin mining and crypto technology company Bitfury, said Bitcoin is trading, as it should, in a risk-free environment where investors will "retreat to Treasury bonds and cash for a short period of time."

Other macro factors are also at play behind the recent market volatility, he said - including looming tax bills on the horizon that traders may not have planned for. The recent drying up of liquidity hasn't necessarily helped matters either.

“Although Bitcoin has some store of value element, it is still so thinly traded that it behaves more like a risk asset,” Brooks said. “Apart from Bitcoin, the right way to think about crypto tokens is that they are risky internet stocks – and internet stocks are way down.”

Meanwhile, the growing prospect of rising interest rates in the US - expected as a way to curb runaway inflation - is also weighing on crypto markets, according to David Tawil, president of cryptocurrency hedge fund firm ProChain Capital. Persistent supply chain congestion is also disrupting traditional financial instruments and digital assets, Tawil said.

“The downturn in the asset class is clearly because the dominant feature has been essentially a growth technology story, a risky asset,” Tawil said. “So if we get into a risk-off environment, there will be trade-offs to the downside, including inflation, rising interest rates and now geopolitical instability.”

Tensions in Ukraine are also increasing the possibility of sanctioned Russian oligarchs turning to crypto to transfer money as banks have cut them off, Mascheck said – and the government itself is using digital assets to bypass traditional finance. It raises the prospect that U.S. regulators will adopt a faster pace as both Ukraine and Russia have moved to legalize and regulate space.

“Obviously these sanctions are going to have some level of impact, but crypto allows for a little bit of work around that,” he said.

Masheck and Brooks both expect Bitcoin to behave less like a risky asset and lose its correlation to stocks as the asset performs.

“As we move forward here, I think we're going to see a greater divergence between what the U.S. markets are doing and what's happening in crypto,” Masheck said.

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The post As Ukraine Crisis Underscores Bitcoin as Risk Asset, Volatility May Be Here To Stay is not financial advice.