This letter was inspired by one of my readers. He messaged me on Sunday after hearing of the news that Russia was going to be removed from the SWIFT system. This was his message »
A number of Russian banks have been removed from SWIFT temporarily.
Bank run has begun in Russia.
Public markets will be affected on Monday.
Russians will take their money out of the banks and put it where?
US dollar? Maybe, some %.
Bitcoin? More Likely.
Then on Monday, it looks like he predicted exactly what would happen. Bitcoin had one of the best trading days in terms of percentage points in more than a year. The exact cause of the increase is difficult to determine, but I think I can shed a little light on the rise.
I’ll also give a bit of commentary on how I think the unfolding of the broader geo-political, and macro-economic situation will affect bitcoin. But first, let’s talk about what is happening to bitcoin on a technical level.
Tradable Bitcoin Supply is Low
To start, I think it is relevant to point to a couple of on-chain metrics to support my later assertions.
The amount of bitcoin being traded on exchanges is at an all time low. Another way to say this, is that the “illiquid supply” is high. Illiquid supply is different from “low liquidity”, let me explain the difference.
Illiquid Supply: Supply of an asset that hasn’t moved in a determined period of time
Low Liquidity: A market wherein buyers/sellers are unable to fill their entire order at their desired price.
Below is a chart from Glassnode that displays illiquid supply vs. the price of bitcoin. The orange line is the number of bitcoin that hasn’t moved in some determined amount of time. The black line is the price of bitcoin in USD.
Glassnode has defined illiquid supply and you can read more about that here.
About 78% of the supply of bitcoin is currently illiquid, meaning it not being traded on exchanges. As you can see in the chart, illiquid supply and the price of bitcoin are related to one another.
When illiquid supply is high, the price typically follows. What we’ve seen since November of 2021 is a decrease in price, but no decrease in illiquid supply. I expect the price to correct and track closer to illiquid supply. Perhaps we’re seeing that play out right now.
What illiquid supply ultimately means for the price is that it is easier to push the price of bitcoin around. There is less bitcoin to be bought on exchanges while the demand for it either stays the same or increases. This is a recipe for an increase in price.
Additionally, since the illiquid supply is trending upwards, the buyers of the bitcoin are removing the bitcoin from exchanges, only reducing the tradable supply even more.
We can see something interesting playing out on another chart from Glassnode. This chart displays the number bitcoin addresses holding a non-zero balance (orange) against the price of bitcoin (white) on a logarithmic scale.
Again, there is a relationship here. This chart confirms what the previous chart tells us. More people are moving bitcoin off of exchanges into their wallets, adding to the number of unique, non-zero balance addresses.
This is a good thing to see as it means that people are using bitcoin, and they’re using it as a savings technology or long term investment.
March 1st Increase in Bitcoin
The conflict in Ukraine started on February 24th. Several G7 nations including Canada and the United States acted by placing sanctions on Russia. The stock market in Russia fell by about 33% (1/3) in the days following the beginning of the conflict.
Incidentally, the price of Bitcoin rose by more than 33% against the Russian Ruble.
Then on Sunday Feb 28th, many Russian banks were removed from the international payments system called SWIFT. The intention was to “further isolate Russia from the international financial system”.
This is where my friend’s comment comes in. He surmised that either the USD, or bitcoin would increase in price as a response to the measures taken. It looks like Bitcoin was the choice.
Skirting Economic Sanctions
In hindsight it should surprise no one that bitcoin’s value proposition increases after a major country is cut off of the rest of the economic world. Russia is no stranger to bitcoin, they know how it works.
Although reports vary, it is likely the Russian government has their own stash of bitcoin for exactly this sort of situation.
Additionally, the citizens of Russian who are “in the know” about bitcoin are likely using it, or fleeing to it in an attempt to preserve their wealth in light of a 33% haircut in the value of the Ruble.
Both the Russian government, and the people of Russia are trying to escape the negative economic side effects of wartime sanctions.
The illiquid supply of bitcoin is just the sort of backdrop needed to push the price of bitcoin higher when an entire nation is suddenly impacted and prompted to search for a reliable and censorship resistant store of value.
Russia and Bitcoin
Part of the game that Russia is playing, is an economic one. Say what you want about Vladamir Putin, but he is intelligent and certainly not naive. He knows how to play the game political chess. He makes calculated decisions knowing full well what the set of possible outcomes may be.
As this article points out, western nations have been rallying to remove Russia from the SWIFT system since 2014. It would be naive to think that Russia does not have a plan for exactly this situation. It would also be naive to think that the plan does not include bitcoin.
Seizures of Russian Assets
Foreign nations such as the UK are also considering seizing the assets of Russian business owners as well as the Russian government. Russian business people keeping money within the UK are subject to having their assets seized [ source ].
This is just one more reason why Russian citizens may consider converting their assets into something that cannot be seized, like Bitcoin. Another factor leading to added buying pressure causing the rise in bitcoin’s price.
These events are leading people to part with their static, locked, or offshore assets, and obtain bitcoin or other cryptocurrencies which are global, flexible, and liquid.
Bitcoin in Ukraine
By now you may have heard the news that people have been donating cryptocurrency to the government of Ukraine. While estimates vary, totals seem consistently above $14 million [ source ].
In the earlier days of the conflict, the internet was one the first things to stop working within the country. What good is cryptocurrency if there is no internet available to access or send it? Certainly one of the weaknesses of cryptocurrency is that if there is no internet, then (generally speaking) there is no way to make use of cryptocurrency.
This is why the First Vice Prime Minister of Ukraine reached out to Elon Musk and Starlink to hook them up with satellite internet.
I’ll be watching this situation closely to see how the Ukrainian people use bitcoin and cryptocurrency to aid in trade and communication throughout the conflict. For example, the same politician is openly asking for, and requesting donations in cryptocurrency.
It is simply the easiest and most instantaneous way to put money in the hands of those who need it.
It is unclear at this time, but with banking infrastructure interrupted it makes sense that people would use a peer to peer banking service instead of centralized services.
One Ukrainian shed some light on the extent to which legacy financial services such as credit cards are failing him at this time.
The Case for Cryptocurrencies
The conflict in Ukraine is a bad situation, any way you slice it. With what I have written in this letter, I’m not trying to draw a silver lining around it.
This conflict is, however, highlighting the power of decentralized financial services offered by cryptocurrency networks.
Unlike the banks and credit card providers that are failing (by no fault of their own), bitcoin does not need to be operational within the borders of Ukraine in order to serve the people. The people only need an internet connection in order to have continuity of service.
Cryptocurrencies are a Tool
The position I’ve held on cryptocurrencies for as long as I can remember is that they are a tool. The conflict in Ukraine is a perfect example of how a tool can be used to support a war faring nation, as well as a nation that is under assault.
On the one hand, the nation waging war is likely using bitcoin to skirt economic sanctions. On the other, the people under attack are using it to save whatever wealth they have left, and continue funding their defence.
The Path Forward
To say the path forward is uncertain is an understatement. But let me make a couple of hypothesis around how I think this will play out with respect to how governments see and deal with cryptocurrencies.
There is clearly a positive and negative use case for cryptocurrencies being played out on the world stage right now. As I outlined in three of my previous letters, I urge you not to politicize bitcoin.
Reject any attempt by media or authority figures to politicize bitcoin.
The Price of Bitcoin
I think it is safe to say that bitcoin is a tool that is being used by nations. This is certainly true of El Salvador who is using bitcoin to escape the dollarization of their country.
We already know North Korea is using cryptocurrency to escape sanctions and fund their operations [ source ].
Now we have the situation with Russia and Ukraine. On both sides, the situation is prompting people to seek a safer place, and a more reliable way to hold and use money.
For me, this leads to one outcome, which is a rise in the price of bitcoin as the conflict worsens. If the price of bitcoin rises exceptionally, it could then prompt people in the west to FOMO into bitcoin.
Note: Bitcoin Functions Regardless of Price
Despite the discussion of the price of bitcoin throughout this piece, there is one thing worth noting. The price of bitcoin is somewhat irrelevant to these countries as they explore the use cases of bitcoin.
Bitcoin will actually function just fine for them somewhat regardless of the price. In this specific case, the value proposition of bitcoin isn’t that the price will hopefully go up over time.
The value proposition for El Salvador, North Korea, Russia, and Ukraine is more or less the same - that bitcoin is a money that cannot be censored or seized. Regardless of if you agree with how these entities are using bitcoin, they’ve all migrated to it in one way or another to tackle a problem they were having.
Technologies like this don’t go away; they grow.
Stablecoins Laying in Wait
One last note about the price of Bitcoin; there is evidence that there is a large pool of stablecoins waiting to be deployed into the market. There is $79 billion in USDT, $53 billion in USDC, $18 billion in BUSD, and $12 billion in UST in circulation right now [ source ].
That is $162 billion USD one click away from purchasing cryptocurrencies. Granted some portion of this is in use on loans, and yield farming applications. But even then, this money is two clicks away from purchasing cryptocurrency.
Such a deployment of capital in conjunction with the events taking place on the world stage could be the catalyst to spur a new bull market.
Message to Readers
Thank you for reading my letter. If you know someone who is interested in this sort of content, please share my letter with them. If you liked my content, hit the like button and leave me a reply.
If you want to see a topic covered, or if you want to share a perspective that I didn’t cover in this letter, send me an email. I’ve had a lot of you reach out to me recently and this is the sort of feedback I need to keep writing these letters for you.
Regards,
Keegan