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Monthly Market Review - February 2022

Today we will look at how digital assets play a role in the ongoing situation in Ukraine and how they may react moving forward.


As we have discussed extensively in these monthly notes, many believe that Bitcoin’s most prominent use case is as a form of digital gold, where holders believe in Bitcoin’s ability to serve as a censorship-resistant safe-haven asset during risk-off periods in the market.


However, as discussed in our prior notes, Bitcoin has been acting increasingly like a risk-on asset during the past six months, especially during the broader tech sell-off seen since November 2021. The graph below shows the correlation between Bitcoin and the S&P500 (SPY). One can see that Bitcoin and the SPY have had a rising correlation as they have both been affected by the same macro forces since March 2020 and increasingly since November 2022.

The narrative of Bitcoin acting as a haven asset is becoming harder to justify when one compares it with the reality of rising correlation with the SPY as the broader macro environment tightens. If the correlation to the SPY maintains at this level, it will soon be apparent that Bitcoin isn’t an effective safe-haven asset for USD-based investors.


Another narrative of crypto is that it is censorship-resistant and that investors can use it to protect their assets in economically vulnerable countries such as Argentina or Russia. Typically, these countries have very high inflation, so people prefer the risk of volatility over high inflation. Due to the situation in Ukraine, Russia has become one of these countries. In late February, one can see a marked increase in BTC/RUB volume as Russians started to buy Bitcoin as their currency began to fall. This increase in volume partially vindicates Bitcoin’s censorship-resistant thesis.

However, the above chart is only half the story. The below chart shows that Russians prefer holding US dollars when given a choice. Note that the y-axis below is double the BTC/RUB volume.

USDT isn’t as censorship-resistant as BTC, so is it rational for Russians to operate in it? USDT works on Ethereum and can be freely sent, but the company that runs Tether can freeze the USDT of any address at any time. Note, nobody can do this to Bitcoin’s addresses.


We believe that Bitcoin (or USDT) is an unviable method of evading sanctions for two reasons. Firstly, as sanctions have increased, all crypto exchanges have come under increasing pressure to comply and blacklist users. All exchanges already implement KYC and AML checks against sanction lists, so any person who is directly sanctioned will be unable to operate on these exchanges.


Secondly, all transactions on the blockchain are transparent and permanent. So, anybody who is moving large sums of wealth will be flagged and monitored. If these addresses are tied back to avoiding sanctions, now or in the future, then there will be severe consequences. The risk of discovery is high, which means other asset classes (gold, cash, etc.), which don’t have an auditable trail, are more viable routes to evade sanctions. These risks are real; for example, the founders of BitMEX pleaded guilty this month to breaking Iranian sanctions and face jail time. A journalist uncovered the perpetrator of the DAO hack in 2015 (Ethereum’s first and largest hack) this week after he transferred some of the hacked funds into a wallet that she could trace back to him.


Moving forward, we expect the industry to be forced to comply with digital asset regulation as regulators will explicitly include it in all sanction notices. Already crucial infrastructure such as Infura, which allows developers to access the blockchain, has sanctioned users (Venezuela, but Russia may follow). In the longer term, we believe that obeying regulations will be good for the industry as it enters the mainstream and shakes its reputation of being used as a money laundering route.