The Russian Invasion Led to Crypto’s Free-Fall

News reports are claiming that this is “cryptos moment”. Cryptocurrency can help Russia circumvent global sanctions, has aided in raising money for Ukraine’s cause, and many in the financial sector speculated that the war would accelerate growth in the crypto sector.

No one is talking about how the Russian invasion of Ukraine has led to the asset’s collapse. Yes, the asset. Cryptocurrency is behaving as any asset would — much to the chagrin of crypto libertarians.

Crypto prices briefly fell after the initial invasion of Ukraine, but rose shortly thereafter, easing fears by investors that crypto was going to clench like every other asset. But market forces beyond have proven that this new asset is more closely pegged to traditional markets than previously thought.

Crypto and Interest Rates

Prices climbed nearly 8%, skyrocketing inflation since the Russia-Ukraine conflict began. Rising oil prices have also caused rippling supply-chain issues, likely to affect product prices across the board. Just four months ago, it appeared likely the Fed would raise the interest rate 0.25 points. In June, the Fed approved a 0.75 point increase in the interest rate, the biggest hike since 1994. It is likely another hike of equal proportion will be implemented again soon.

Bitcoin, and other cryptocurrencies at large, have an inverse relationship with the U.S. Fed interest rate. As a result, we will continue to see another dip in the cryptocurrency market, plunging the industry deeper into crypto-winter.

Crypto and the Stock Market

Bitcoin has been responding to the invasion of Ukraine much like the stock market, claims Ben McMillan, chief investment officer of IDX Digital Assets. The stock market performs poorly during times of uncertainly; investors contract in a bear market, unwilling to make investments when future performance is so unpredictable.

According to a Bloomberg report released in January, the 40-day correlation coefficient of Bitcoin to the Nasdaq 100 reached 0.66 — the highest reported correlation since Bloomberg compiled this data in 2010. They reported a similarly high correlation with the S&P 500, which just reported its worst performance in the first half in more than 50 years.

What This Means for Price

In our research, we rely heavily on traditional financial data, stock market performance, and interest rates. These elements are critical to understanding cryptocurrency price volatility and will become increasingly important as Bitcoin continues to trend towards more traditional asset behavior.

As a high-volatility asset, fluctuations in price as the Russia-Ukraine war continues will likely be even more pronounced than before. Long-term investment plans will provide a better path forward for investors. Without knowing how exactly the price will perform, knee-jerk reactions to the market will likely result in greater losses over all.