Digital asset manager Grayscale notes that the Russian invasion of Ukraine has impacted international markets, including crypto-assets, which have “historically shown correlations to risk assets.”
As noted in a blog post by Grayscale, this relationship has “become even more pronounced in recent years as institutional investors have increased their presence in the crypto universe.”
As Grayscale had mentioned in their January 26 Market Byte (Macro Risks In-Focus, but Secular Growth Story Remains) and their February Newsletter, Fed monetary policy and geopolitics have “continued to be primary drivers of crypto prices and market movements.”
Although cryptocurrency markets experienced “a ~25% rally following the January Fed meeting, the asset class has since retraced those gains with the broader risk asset sell off.”
Grayscale also mentioned that Bitcoin has been “especially resilient, rebounding from a 12% drop within 12 hours on news of Russia’s invasion of Ukraine.” The near-term geopolitical situation continues “to unfold and the market response remains fluid.”
As noted in the update from Grayscale, crypto-assets (using BTC as proxy), U.S. Equities (S&P 500 Index), and Russian Equities (Russia Trading System or RTS Index) have “roughly tracked each other during the beginning of 2022: All three markets rallied from late January to early February, then sold off over recent weeks as Russia escalated geopolitical tensions.”
Grayscale also mentioned that global commodity prices have “increased over the past two years in response to the strong global economic recovery.” This trend has “accelerated over recent months as rising geopolitical tensions have amplified supply chain disruption concerns.”
Grayscale pointed out that Russia is “the world’s third-largest producer of liquid petroleum, the second-largest producer of dry natural gas, and a major source of energy for Europe.” Meanwhile, Ukraine is “the world’s fifth largest exporter of wheat.”
The team at Grayscale pointed out that markets appear to have “priced in higher Fed rate hike expectations since last quarter, roughly around the time crypto markets peaked.”
The update also noted that the Fed Fund futures “rose to price in nearly seven 25 basis point rate hikes during 2022 while pricing in a 50 basis point rate hike during the coming March meeting.” But the hawkish trend “reversed over the last two weeks as investors have been evaluating Fed rate expectations given the rising geopolitical uncertainty.”
The CBOE Volatility Index (VIX) has “become increasingly elevated over the last month and now sits at its highest level since early 2021.”
As mentioned in the update from Grayscale, investor sentiment has “become increasingly negative over recent months and is approaching bearish levels that haven’t been seen since the early part of the pandemic.”
The report also noted that Bitcoin and gold prices have “diverged during 2022 amid the ongoing macro and geopolitical turmoil.” Although BTC is typically regarded as a high risk asset, the volatility may “present good buying opportunities while the asset continues a long-term upward trend outpacing gold.”
There’s always reasons “to be bullish and reasons to be bearish, but what matters most is which will outweigh the other, especially over the long term.” Grayscale added that while current macro conditions and geopolitical tensions have created a tough environment for markets, they believe that crypto investors “focused on the long-term should see the recent volatility as an opportunity.”
For more details on this update and the list of references cited by Grayscale, check here.
