The escalating tensions between Russia & Ukraine, and FED’s “Emergency Meeting'' on Feb 14th, 2022 are the hottest topics causing the ongoing upheavals in the financial markets. On the edge of the imminent storm, how will the potential effects of those events impact the crypto world?
Above all, what should we do to protect ourselves and our portfolios in this high-volatile market? Let’s find out together in this article!
Russia & Ukraine Tensions
The Setting of the Russia & Ukraine Tensions
Before going into any detail about crypto, we will write a quick and concise brief to help you get the overall panorama of the current situation between Russia and Ukraine.
In the past, Ukraine and Russia were in the Soviet Union, making a strong bond among those countries. However, in 1991, after the Soviet Union dissolved, Ukraine and some other regions claimed their independence. Since Ukraine used to be a strong constituent republic in the Soviet Union, the power of Russia has been weakened for the time being.
Currently, there is an internal conflict in Ukraine about whether to lean towards Russia or to the Western countries. This divides the Ukrainian people, making the country unstable for foreigners.
At the end of 2013, the president of Ukraine, Viktor Yanukovych, rejected a trade pact with the European Union. The refusal made the Westerners in Ukraine unhappy. Consequently, in 2014, they went on a protest against Viktor’s government and formed a new government.
Due to the potential threat from Ukraine, Russia sent armed troops to Crimea (the primary target is the Sevastopol port). To legitimize its military buildup movement, Russia carried out a few political activities to win support from the locals, and openly annexed Crimea via voting despite the interference of the United Nations.
Russia is claimed to steer political and military interventions in support of the force labeled “Separatist” on the territory of Ukraine.
In addition, Russia also enforced economic sanctions on Ukraine, causing the economy to go into depression. Western countries also implemented the follow-up economic sanctions on Russia in response. As a result, Ukraine has been somewhat an economic chess table for the greatest nations.
Even though they signed a mutual ceasefire in 2015 with a mutual target to lift the economy in Ukraine, NATO was still aiding heavy arms and military support to Ukraine. This was considered a potential threat to the security of Russia.
Consequently, Russia forcibly executed a military buildup near the Ukraine border to ensure national security and wanted to send a message to NATO to ensure that Ukraine does not join any military organization since it might hugely affect the economy as well as the security of Russia. This is the big picture of the tensions.
To reiterate, the essence of this conflict is a long-lasting confrontation between Russia and NATO (led by the EU and the US) on the battleground in Ukraine. The ultimate goal of all sides is still to possess economic benefits as well as resources (geopolitics, natural resources, influence,...) for their own countries.
Russia - A Mega Supplier
In this section, I will scope into Russia's economic (not military) aspects as every action is motivated by benefits.
First, it’s fair to mention the strong moat of Russia is that the country has an abundance of natural resources, (natural gas and oil more specifically). According to data from Statista (updated in 2020), Russia is currently the third-largest crude oil producer in the world.
Other than crude oil, Russia is a major supplier of natural gas to the world, which takes up 24.3% of global reserves (data from Worldometer).
Holding a strong natural gas reserve, Russia is now supplying about a quarter of the gas demand of the EU and the US. For instance, the Nord Stream 2 pipeline between Russia and Germany is to supply natural gas to millions of German households. This will create heavy pressure as “a sharp sword” to bring to the table with the US and the EU.
The statistics from Eurostat show the energy demand of European countries is mostly dependent on natural gas and oil (Russia plays as a strategic supplier). Moreover, Russia is also a core member of the Organization of the Petroleum Exporting Countries (OPEC). Therefore, Russia has built up “an energy arm” to spread out its influence on other developed countries.
Gas and oil are mentioned to prove that the potential global energy crisis might happen if Russia starts strong reactions to the actions of the Western. In the worst scenario, a global crisis might be ignited, making the global financial market super high-volatile and unpredictable.
Financial Markets In The Tensions
To begin, possessing abundant resources and being a major force on the world political & military map are huge advantages for every country which wants to lift the global political position. With some favored cards in its hands, Russia is about to play a political game with the Western.
On the edge of war, experts from many sides predict that the US and Western countries will not directly intervene with the Ukraine army but will remotely impose strong economic sanctions on Russia. However, Russia has concluded many long-term deals with China. This makes the current situation become more complex.
On the other hand, in these Covid years, the current developing speed of many regions is being dragged, especially in the US and Europe. Namely, inflation seems to inevitably increase. The global financial markets will get worse if all sides fight back and forth.
The first thing that can be mentioned is the issue of energy. In 2022, the EU has faced an energy shortage leading to rising prices ⇒ Negatively affecting people's daily life, especially those who are in the lower class.
⇒ Almost half of EU natural gas imports come from Russia (45.5% in 2019 and 43.4% in 2020).
What if Russia cuts its exports to Europe and the US?
As the Covid pandemic is being controlled, every daily job is back in operation, causing the demand for goods to increase. As shown in the statistics, Russia is now a key player in many strategic industries, what if it makes any intense movements?
Global inflation and economic stagnation are likely to happen, forcing central banks to take action to regulate the interest rates and tighten monetary policies. That’s why the world is listening to the FED’s announcements after every board meeting.
The commodity prices will typically increase due to inflation, which is the lead indicator to show the health of a nation. The mass will focus on crude oil because the EU might face an energy crisis if Russia cuts the energy exports.
⇒ Oil prices will staggeringly skyrocket due to the high energy demand. This will affect the price of Bitcoin since its network requires a huge amount of energy consumption.
To summarize, the ongoing tensions between Russia and Ukraine is negatively affecting the financial markets:
- Economic sanctions and many restrictions will lift the commodity costs.
- Big central banks will take action to raise the interest rate.
Even though we have not yet seen any strike-back actions from Russia in the commodity market, it seems that investors, as well as manufacturing companies, have been front-running the news. To follow up the market, we can see the current performance of the commodity market:
- Oil Price is in its bullish trend, approaching the $100 mark.
- Gold price increased by 3% in 7 days.
- Wheat price increased by 3.5% in 7 days.
- Corn price increased by 1.8% in 7 days.
Highly-anticipated plans to increase the interest rate also have a huge effect on other markets:
- S&P 500 Futures was down 0.8%
- The Nasdaq index, an index for all companies (mostly tech companies) on Nasdaq, increased by 1.1%.
- Stoxx Europe inclined 2.7%.
- Yields from bonds decreased since the bond buyers were increasing.
⇒ At the moment, cash flow might shift to the asset class (fixed income bonds, gold, cash) that is more stable and contains lower risks than high-volatility assets (stocks and crypto).
We can see the financial markets are moving, even though the tensions are under the control of all the parties. As mentioned, it is reacting as the mass are preparing for the worst-case scenario which might happen. Covid is a notable example of a Black Swan to the financial markets.
FED’s “Emergency Meeting”
In the storm of unstoppably escalating inflation and the tensions in Ukraine, FED is going to hold a closed meeting on Feb 14th, 2022.
Inflation At A Warning Rate
U.S. inflation rate is at a 40-year spike high as consumer prices rose at a 7.5% yearly rate as of January, FED expected the number to be “2%”. This means the inflation is moving at a warning speed and FED will likely take action to slow it down.
FED has taken some actions in the meeting in December 2021. In detail, after the meeting in December 2021, FED would maintain an average interest rate of 0.9% (compared to 0% - 0.25% now) and consider raising it 3 times.
In the macro, the pressure from the tensions between Russia and Ukraine is reaching its peak. The FED's decision will affect the economy at a global scale due to many existed monetary policies.
Lower-income households tend to open their wallets more on essentials in the period of 2020-2021. On the other hand, non-essential seem unattractive as the Covid pandemic makes them tighten their belts since the outbreak.
⇒ As the commodity prices are marching at a fast pace, consumers tend to think twice before laying the purchases. As a result, the high inflation rate is negatively dragging the economy.
To reiterate, the FED announced to raise the inflation rate as planned, which will happen in the upcoming meeting in March 2022, the question is what will be the rate? Some experts have anticipated and let’s find out in the following section.
According to Bloomberg, traders are now pricing 7 FED hikes in the interest rate. Financial experts at Goldman Sachs assume FED will consecutively raise the interest rate 7 times (0.25% each). Furthermore, it’s estimated that in the upcoming March 2022 meeting, the interest rate might be increased by 0.5% by FED. A full 1% interest rate by July 2022 is being considered by the president of FED.
As shown in the chart, after the 7.5% inflation announcement, the interest rate will reach 1.5% by the end of 2022 and the Fed will keep it in a stable range of 2.0% in the following years.
⇒ Due to the ongoing tensions, FED might change the interest-raising date to sooner and more intense, making it cumbersome for crypto users to have a quick reaction.
Tensions Lead To Actions
As retail investors, we should follow close macro events that tell a lot on the long-term scale. The interest rate, monetary policies, inflation, and ongoing tensions will tremendously shake our investment portfolio. Let’s dive in deeper to get insights to position our portfolio.
Stock and crypto are increasingly correlated and they are both listed in investment assets containing high risks. However, let’s take a closer look at stock data that might lead to actions.
Over the course of 2020-2021, the actual EPS (Earning Per Share) was always bigger than the expected growth. Only at the end of 2021, the gap between the actual and forecast value was close together. The EPS peaked in Q2 2021 then inclined quite drastically, showing the business of many companies were in the unfavored time.
⇒ The interest hikes will have negative impacts on businesses that are in debt and having financial problems since they will have to pay additional money to cover the interest. There will be almost no “free money” with interest close to zero, available to stimulate the economy like before.
As shown in the chart, the stock market might have a major correction in the future years. The Dotcom bubble in 1999 dragged the market down for many years after FED tightened the belt. In 2022, the 22.8 hike is also a reasonably high number for FED to load up the new monetary policies.
Although the FED monetary decision might affect the financial markets in the short term (days and months), the long-term trend (years and decades) will always be up as the development of humans. Therefore, history says that the market will immediately react to the news of the interest hikes then it continues the growth.
How should We react in the Crypto Market?
At the moment, crypto and stocks are bonding in a relatively close correlation. Stocks will be affected by the interest rate and so will crypto. We think large-cap crypto will have to endure most of the influence. And the tensions between Russia and Ukraine will unpredictably affect the markets if the worst scenario happens, crypto will take the hit.
As researchers, we have a different perspective on this sequence of events. To begin, we should take a look back at when the dawn of the crypto era started.
- 2008: Financial Crisis at the global scale ⇒ Bitcoin was a new way to store value, “Digital Gold”
- Bitcoin In Bull Run 2011, 2013, 2017: It was praised to be an alternative to traditional fiats and global payments.
- 2020: Crypto crashed in March like every financial market due to Covid. Then the bullish trend was full of doubt.
- 2021: The game was quickly accelerated and the mass adoption thesis was back. At the same time, many Covid variants appeared.
- 2022: Geopolitical crisis and high inflation, what’s next?
Nowadays, Bitcoin is considered to be an escape gateway since many crypto degens believe the assets will even skyrocket if Russia and Ukraine tensions get worst. On the other hand, International Monetary Fund (IMF) views Bitcoin or other crypto assets are nothing more than “a kind of tech stock”.
As in our views, if Russia steps further into Ukraine’s territory, Bitcoin and crypto assets will have a flash crash since it’s very bad news. However, after the price shocks of these unfortunate events, we estimate the crypto market will recover.
The current 2022 landscape is much more different than the 2017-2018 crypto bubble, institutional money, as well as some governments, are flooding into the game. Micro Strategy, Grayscale, and El Salvador are the most notable examples of the crypto fresh breeze. In the new context, Bitcoin, as well as other determining crypto projects, are going strong as getting a part of daily needs.
To protect our “bags”, we will put some recommendations and suggestions forward for you all to consider and take action if they fit you:
- Generating money flow via Farming/Staking strategies: We should put our crypto assets into protocols to earn additional token rewards. Since this contains many risks such as rug-pull, we should carefully pick out protocols that are highly secured and reliable.
- Large-cap tokens/coins in the portfolio: These top coins share the same feature which is low volatility. In a severe crypto market time, high-cap tokens are drained the least.
- The story is not true for altcoins: Altcoins might give us multiply investments many times in a bull run. On the other hand, they might be delisted or deprecated during extremely unfavored circumstances, resulting in losing our investments. To reiterate, we should position our portfolios according to market health.
- Avoid a quick-rich scheme: In the bull run, it can make you a huge fortune in a really short time, but it can sweep out your portfolio in a second. We should avoid this type of investment in the bearish market. The same with forked projects, they quite often leave the project when there are no potential benefits.
- Psychological awareness: 4 years after the 2017 crypto bubble, we are ultimately in a bull market. Therefore, it’s really important to prepare ourselves for the next circle which might come after many years.
To reiterate, FED’s decisions and the outcome of the Russia and Ukraine tensions will have a massive effect on the financial markets, especially crypto. The crypto market can be extremely volatile whenever news is released. As in the history of Bitcoin, the price can be dragged in short term but in an uptrend in larger timeframes.
That is all you need to know about the two events and how everything is happening in the markets. We hope you’ve gained insights that are valuable to your investments.