WEEKLY, June 24, 2023

Civil war in Russia, and what this could mean for crypto markets

Hi everyone! Talk about an interesting start to the weekend…

Since many of you are new here (welcome!), I should introduce myself again. My name is Noelle, I’ve been writing crypto newsletters with an institutional focus for seven years now, first for CoinDesk as MD of Research (among other roles) and then for Genesis Trading as Head of Market Insights. I left there in September of last year to focus on what I really care about: the overlap between the crypto and macro landscapes.

The Saturday edition is usually a general overview of markets, crypto ecosystem developments that impact the macro field, and sometimes a column on a topic I’ve been thinking about. For premium subscribers, Monday-Friday I dive into narratives, developments and theses that sketch out how the two worlds are dancing around and working with each other. If you’re not a subscriber, I do hope you’ll consider becoming one to support my work – it’s only $8/month for now, with a free trial! 😊

Of course, nothing I say is investment advice! Or legal, or tax, or any kind of advice, except for listening recommendations and good links.

With all that out of the way, on with the show.

MARKETS

So, I got up early this morning to write the market commentary for this newsletter (because regular readers will know that I recently learnt my lesson about doing it the day before – things change fast in crypto markets!), but ever since then have been glued to Twitter watching the rebellion/coup/civil war unfold in Russia.

I was planning to talk about the message embedded in BTC’s dominance surge, the narrative decoupling, building ETF speculation and some of the other huge developments from the week. Those are big deals for crypto markets and ecosystem development – but, arguably, a likely change of leadership in Russia trumps just about everything.

Even if Putin survives this, Russia will not be the same going forward. Putin’s survival would mean that Prigozhin no longer heads the Wagner military group (conducting operations on the ground in Ukraine and essentially running the economies of some central African countries), and that Russia’s military structure has new leadership. This would imply a new foreign policy and military strategy.

A more likely outcome is that Putin doesn’t survive this, but it is as yet unclear who would step into the void. It could be Prigozhin – the Wagner group so far has met little resistance in its march on Moscow. Or, it could be Russia’s military chief Gerasimov, who earlier this year was handed responsibility for the Ukraine campaign. Or, it could be someone more under the radar. Whoever it ends up being, they will be lacking in global leadership experience, at a time when Russia is increasingly divided, China is leveraging its economic weight in the region and surrounding states are figuring out to whom they should sell their allegiance.

Whatever happens, the end to the war in Ukraine looks more likely, especially if the rebellion turns out to be an extended internal conflict. If Russian factions are fighting each other, there’s fewer munitions and soldiers for other regions, and once a victor emerges, he is likely to be more focused on consolidating political power, which generally involves promising economic improvement.

So, as we repeatedly hit “refresh” on our screens today, we should start thinking about what the end of the war will mean for markets.

Obviously, much depends on the conditions of any ceasefire and on the conditions on the ground when that happens. But, in most scenarios, the end of the war would be very good for pretty much all assets. The “peace dividend” after bloody conflicts is real.

Investment would pour into Ukraine – US investment funds started their outreach months ago. Global liquidity conditions would improve as banks trip over each other to lend to enterprises involved in the rebuilding.

This would not be great for the fight against inflation as a surge in infrastructure investment triggers a scramble for commodities. This means higher rates for much longer, which would exacerbate fractures in the US deficit (as an ever-growing percentage goes toward servicing debt) and which could unearth new strains in Treasury markets (low liquidity combined with a surge in the demand for collateral) while exacerbating old ones in the financial system. But, on the whole, markets will be feeling good and before long higher rates will seem normal again.

Crypto assets, especially BTC as the main gateway and the key “macro” play, could benefit even more than other asset groups through their sensitivity to liquidity conditions as well as their fixed (BTC) or balanced (ETH) supply schedules. Plus, the inevitable geopolitical realignment would boost global uncertainty as well as the need for “insurance” assets. Whatever shape the realignment takes, it is unlikely to favour the US.

One extremely puzzling feature of crypto markets this morning is their lack of reaction to what’s happening. BTC’s price jumped yesterday, well before reports of the Wagner group moves. Since early this morning, it has been largely flat.

(chart via TradingView)

This is puzzling because BTC is one of the only liquid macro-sensitive assets that trades on the weekend. It is supposed to be a bellwether for how other markets will react on Monday, and yet it seems to be strangely indifferent. Something weird did happen in the options market this morning: implied volatility plummeted and then bounced. I’m not an expert on this, but the slope and recovery suggest a programmatic trade?

(chart via TradingView)

Maybe BTC traders are as confused as everyone else about what is unfolding?

Whatever happens over the rest of the weekend and going forward, today is a historic day. It still blows my mind that we get to watch it unfold in real time on our screens. If you want to keep scrolling all day, I’ve created a “Russia” list of Twitter accounts I’m following, but bear in mind always that information is disjointed and often misinterpreted. In other words, given how heated the situation is, choose sources carefully and treat everything with some scepticism.

KEY DEVELOPMENTS

I can’t ignore that some interesting things happened in the crypto ecosystem this week. For reasons of time and space, here are just a few:

Bitcoin dominance. This metric, which measures BTC’s percentage of total crypto market cap and is tracked by the BTC.D index, broke through 50% since April 2021. Normally, an increase in BTC.D signals either a weak market (with BTC falling less than smaller-cap stocks as investors rotate into the “safer” crypto asset) or the consolidation of an inflection point as BTC is usually leads the beginning of a rally as it is seen as the main “onramp” into the crypto asset investing world.

(chart via TradingView)

In this case, it’s the latter – BTC is seeing some new interest given building speculation that it might actually get a spot ETF this year, which could also imply a regulatory thaw.

And, given the constant accumulation of BTC by longer-term holders – almost 69% of BTC hasn’t moved in over a year, more than 40% hasn’t moved in over three years – there is a dwindling amount of “available” supply for new entrants. Obviously, all supply could become available at a certain price, but at these price levels there are few eager sellers.

A narrative shift. This week was not great for macro risk assets, with Fed Chair Powell repeating in front of Congress that more rate hikes were likely, and with the swaps market consolidating predictions that one was coming in July. Stocks fell. BTC, on the other hand, had a very strong week, up almost 20%. Bitcoin and other crypto assets are, for now, moving to a different drummer, driven largely by crypto-specific news that for the first time in ages is not bad.

Of course, macro considerations will never be far away, and a stock market slump – which I think is likely, given incoming earnings revisions – could drag crypto prices down with it. But, for now, the set-up for a rally is looking more solid than at any time over the past year at least.

SAP and USDC. Enterprise software giant SAP is testing USDC for cross-border payments. Testing is not the same as using, but it is a loud signal regarding the potential for stablecoins to solve payment frictions. Should this get implemented, it would be a huge boost to USDC demand, given how many businesses use SAP services.

There are many, many more (most were featured in the dailies this week), but I have to get this loaded, hit “send”, and get back to scrolling Twitter. An epic day.