The crypto volatility is not new to long-term investors. The digital currency market has seen massive corrections in the past few years. Be it 2017’s ICO bubble or the pandemic-driven plunge in 2020, the crypto market has faced several challenges throughout the last decade. However, this time, the cryptocurrency market is following the actions of the traditional financial system.
In tandem with S&P 500 and leading European equity markets, digital currencies have seen massive ups and downs in the last week due to the Russia Ukraine war. Despite the reason that the nature of crypto assets is different from traditional financial assets, geopolitical issues impacted the global markets equally. Finance Magnates sat down with prominent voices in the digital asset space and asked them about the rising correlation between crypto and traditional markets.
“The current geopolitical tension between Russia and Ukraine has escalated even further. Although the conflict was expected to escalate and it was just a matter of time, the market is assumably unprepared for the ongoing situation, stirring a slump in the prices of Bitcoin and altcoins,” Daniele Casamassima, the Chief Executive Officer at Pure Fintech, said.
“This uncertainty in the crypto market is further hindered by the fact that there is now a close correlation between financial markets and global crypto markets. The digital currencies, although badly affected at the moment, in the long run, could become the only feasible option for those people that are the most affected by new economic sanctions. Therefore, the bear market could turn into a bull market,” Casamassima explained.
Crypto’s Dependency on Traditional Markets
Kevin Mudd, the Chief Executive Officer at D-CORE, believes that with the growing adoption of digital assets in the global financial ecosystem, the dependency of cryptocurrencies on traditional markets has increased.
“As unfortunate as it might seem for a currency that promises to be a hedge against the traditional system, Bitcoin is still heavily correlated to traditional markets. This correlation might only increase with financial institutions adopting it, which is why we shouldn't be surprised to see its price dropping at a time of great economic uncertainty. Ultimately, Bitcoin is still a highly speculative instrument in 2022, which might not change any time soon. There are many significant use cases and advancements in blockchain technology and cryptocurrency, but these alternatives still currently rely on positive macroeconomic trends,” Mudd said.
Price Action
According to Farah Mourad, the Senior Market Analyst at XTB MENA, the strong correlation between Bitcoin and other risk assets is putting more pressure on digital currency.
“On a wider scale, and given the strong correlation between bitcoin and other high-risk assets such as growth stocks, especially since December, where we saw both assets in a synchronized downward trend, we might witness additional pressure on bitcoin’s upward movements, especially with a first-rate hike looming in the horizon and the uncertainty of the geopolitical tension. On the other hand, the fear and greed index, an indicator of trader sentiment across the cryptocurrency market towards Bitcoin, is signaling 'Extreme Fear' among market participants,” Farah said.
“Historically, excessive fear has resulted in Bitcoin trading well below its intrinsic value, however, we can't rule out further correction with the stock market due to ongoing geopolitical tensions, but it might support the prices on the mid-term. And, while the tensions are rising, the Bitcoin network has hit yet another all-time high in mining difficulty after a steady climb since last July’s lows. Jumping to 27.97 trillion hashes (T). This is now the second time in three weeks that Bitcoin (BTC) has hit a new ATH in terms of difficulty which is usually supportive for prices,” she added.
Potential Impact
“Well, Russia will be out of SWIFT protocol, so cryptos could be a safe harbor to provide liquidity in case of international sanctions. Furthermore, Ukrainians, due to the blocking situation, will look for alternatives to protect their savings or sending money out of the country,” Joaquim Matinero Tor, a Blockchain Associate at Roca Junyent, said.
