Bitcoin and cryptocurrencies have not held up as much as many crypto-bulls would have hoped during this time of concern. After peaking around $69,000 last November, Bitcoin has struggled to even stay above $40,000. The price of Bitcoin recently even dipped back under $35,000 briefly during the missile strikes and the Russian troops invading Ukraine even further than the separatist regions.
Many of the Bitcoin and cryptocurrency “HODLrs” have been touting endless upside for cryptocurrencies and other digital assets for quite some time. When Bitcoin was on its way to nearly $70,000 it was routine to see countless amounts of tweets, news stories and interviews where pundits were predicting $100,000 or $200,000 or even higher for Bitcoin.
So, what happens now? There is not a single person on the planet that can definitively tell anyone where the exact price will be at any given time. That said, we wanted to address some considerations that HODLrs need to keep in mind during a period where one larger nation is invading a smaller nation.
Some pundits have called Bitcoin and other digital assets out as being the perfect reserve asset in the world. Some pundits have said that Bitcoin makes investing in gold irrelevant. And some pundits have said that Bitcoin is the place to be for when inflation and a massive debt level are coming into play.
As for what the newer wave of crypto-bulls need to be thinking about is that so far none of this has panned out in the manner that they were thinking or hoping. It doesn’t mean that the views will be wrong forever, and it doesn’t mean that the view won’t pan out in the years ahead. Just take to heart that there are no guarantees in the markets, and the markets come with the paradox that being 100% right on your call may not prevent you from going broke!
Here are some things to consider, and please think of Bitcoin more in-line with crypto in general rather than Bitcoin versus everything else. And there are of course many other risks.
1. Bitcoin has never really endured a war
One harsh reality to consider is that Bitcoin’s last decade has not really had to endure the risk of a spread of armed conflict on a global scale. There were two decades of armed conflict in the Middle East and around the globe, but none have been between large nations head-to-head. Ukraine is not being viewed in a vacuum at this moment because Russia is rattling its swords louder and acting faster. There is an ongoing risk that another nation with well over 1 billion people, which is also rattling its swords harder and louder, may finally take action against a nation with only about 23 million people that it wants to take back. Ukraine’s population is 43.7 million people, ranking 34th in the world, versus 142 million or so in Russia.
2. Bitcoin has no FDIC Protection
Bitcoin and other digital assets may be protected in some form or fashion in some accounts, but there is no FDIC, no Treasury and no central bank that can truly protect. No nation will go to war over the digital asset at this point in time. If something happens to your digital assets or the exchange/brokerage you rely upon for this suddenly fails, let’s just say it’s going to be a painful process to see everyone trying to get their crypto and digital assets back.
3. Bitcoin is currently a risk-on asset rather than a defensive asset
Rather than being the ultimate defensive asset that many have been touting, the rising debt in the U.S. (and other nations) and the inflation simply haven’t been working since late in 2021. Bitcoin is trading almost entirely the same as the stock market rather than being defensive or a hedge. That poses a risk that some HODLrs simply stop being HODLing, and the large rapid drops can force many of them out even if they may have wanted to keep in the positions. Margin calls are margin calls.
4. China and Russia both want their citizens using their central bank digital currencies
China has been a known anti-crypto nation for over a year now. It wants its citizens using the Digital Yuan rather than an anonymous digital asset it cannot control. Russia has been on-again/off-again about crypto. They will also want Russians using the Ruble or Digital Ruble so they can control the currency. These issues may be easy to dislike, but when you put yourself in any role of governance you can imagine no world power nor any banana republic wants to have no control over their currency.
5. Bitcoin volatility can make stop-losses and limit orders dangerous
Having stop losses can protect asset owners from facing greater risks than they can afford. Many investors only invest when they can have stop losses. But what about when there are flash-crashes? And what about when there is no activity to support the price due to thin markets, holidays or because the largest number of HODLrs are sleeping? Suddenly people get flushed out and may never know it until after they wake up in the morning.
It is well known that there are bad actors wanting to steal anything and everything they can from you online. Some are independent digital thieves or organized crime, but some are state-sponsored hackers. Bitcoin and other digital assets that are not stored offline could simply vanish or the assets could simply be locked up due to the institutions shutting users out. The same is true for bank accounts and brokerage accounts, but it’s a risk (and again you might not get the same type of government/regulatory support as if it was a bank account, stocks or bonds). The Poly Network hack in August of 2021 was said to be more than $600 million and was reported to be the largest cryptocurrency exploit ever seen.
7. Liquidity is still a major issue
Why does it always seem to be that the major moves in cryptocurrencies and digital assets happens when you are asleep or when you are supposed to be enjoying a weekend? That of course is not fair to say “always” but it sure seems like the big drops are taking place around times when sellers are selling without the care of the prices. That is when the cryptocurrency markets feel the most manipulated, but regulators have already warned that it may be a means of laundering and washing money to make it untraceable.
8. Gold has finally gotten its day again
Outside of smaller nations, most central banks still hold physical gold rather than Bitcoin. Gold had traded back to under $1,800 in late 2021 and early in 2022, but it has now jumped back above $1,900 and many gold bugs will again be cheering and chanting for calls of $2,000 (and then of course much higher, if it actually occurs). Many of the same reasons that gold bugs own gold have been cited for why people should (or need to) own Bitcoin and/or other crypto and digital assets. For the time being, in light of armed conflict, gold is getting more attention.
9. Watch growth stocks
Bitcoin has been acting like a risk-on asset rather than the defensive asset that so many people were hoping it would be. This means that HODLrs might want to watch share prices of NVIDIA, AMD, Amazon, PayPal, Square, Coinbase, Mercadolibre, Robinhood, Silvergate, and a slew of other small cap companies deep into the technologies of tomorrow. These are the biggest of the risk-on assets in the stock market. For the time being, their price action seems more tied than not.
10. Watch interest rates and expectations around the Federal Reserve
Up until the last couple of weeks, the markets were all settling lower based on the rate of expected rate hikes by the U.S. Federal Reserve. Will Russia’s invasion of the Ukraine stop Jerome Powell from raising rates at the March 2022 FOMC meeting? Not likely, unless the economy hits a major skid between now and the March 16-17 FOMC meeting. These rate hikes have been so telegraphed that they probably have to be locked and loaded at this point barring some global shock. You can watch the live trading around Fed Fund Futures at the CME site. These go all the way out to July of 2023, and here is a look at what those Fed Funds Futures are indicating will be the effective Fed Funds rate based on these FOMC dates (not exact 0.25% increments):
- March-2022 up to 0.25% (was much higher 2 days ago)
- May-2022 range 0.60% to 0.75%
- July-2022 around 1.00%
- Oct.-2022 around 1.25%
- Dec.-2022 around 1.50%
- Jun/July-2023 1.875% to 2.00%
11. Uncertainty makes government bonds attractive
Similar to gold, bitcoin may not pay any interest, carries no dividend and may not be treated the same as cash reserves or collateral by many institutions. Even if you can get an interest payment at a brokerage (or can lend it out) you might not get to have Bitcoin be considered a pledge asset or collateral. Lenders also know of these risks, and that means that U.S. and Western nations bonds will be considered the safe haven as long as the current warfare risks are on the table.
12. Like dictatorships, democracies can also ban Bitcoin locally
It’s not just dictators and communist regimes that can ban Bitcoin. Any nation, whether it is liked or not, can suddenly and swiftly ban Bitcoin and other cryptocurrencies or digital assets. History is littered with examples of governments banning certain assets during times of need and during times of crisis. In 1933, President Franklin D. Roosevelt declared that the state of emergency was ongoing and Executive Order 6102 suddenly prohibited the hoarding of gold coins, bullion and gold certificates within the United States by individuals, partnerships, associations and corporations. This was wildly unpopular among the wealthy and those who had purchased “safe assets” ahead of and/or during the early years of the Great Depression.
13. You Can Be Spot On and Still Go Broke!
You can be absolutely correct in your market bets or calls and still end up broke! This was mentioned briefly above, but it needs its own warning for times of extreme volatility. Bitcoin could go to $20,000 in a day or it could go to $60,000 in a day. If you are unable to access your accounts, or if there are any emergency declarations, you might not be able to react in time. If a hack attack or excessive trading that overwhelm trading systems then you won’t be able to react. This could be like the massive end of day sell-off from the 2010 Flash Crash in May wiped out 9% of the face value of stocks in less than 30 minutes or so. Some 2 billion shares traded hands, mostly from electronic trading — millions of investors could not buy or sell because their access was frozen or was locking up. Flash Crashes have been seen in Bitcoin. It means you might not be able to Buy (or sell) if a crash occurs, and it means you might not be able to sell if a major surge takes Bitcoin or other digital assets up massively. It’s not fair and it is unjust – but you can be absolutely right on your calls and on your actions and you can still go broke!
As an observation here, this side is only the “risk” view. The benefits of digital assets have not changed one bit for millions of people holding digital assets. And in some cases, despite the price drops that have been seen in recent days and weeks, millions of HODLrs will only have stronger conviction! That’s what makes a market, even in times of despair.
Here are some of the shocks that have crushed the Dow Jones Industrial Average over the last 100 years (numbers rounded), all of which were followed by new all-time highs:
- Stock Market Crash of 1929 (Oct. 28) … -13% in a day
- The invasion of and fall of France in May-June 1940 DJIA … more than -15%
- Pearl Harbor week of Dec. 6 to 10, 1941 … -6.5%
- President John F, Kennedy Assassination … -3% in 2 days
- Nixon resignation around Watergate (Aug.-1974) … -17%
- 1987 U.S. Stock Market Crash … -22% in a day
- USSR invasion of Afghanistan 10 days around end-1979 and start-1980 … -2%
- Asian Contagion October-1997 … -12%
- Heading into and the week after 9/11/01 terror attacks … -14%
- Global Financial Crisis (start 2008 to Q1-2009) almost … -50%
- COVID-19 Outbreak Feb-2020 to March-2020 … -35%