War & Crypto

March 30, 2022

Last blog, in conjunction with Groundhog Day, I predicted 6 more weeks of crypto winter. Could it be that now at the end of March we’re seeing a thaw?

It certainly seems to be, with overall crypto markets up. In the same month US News and World Report named our CIO Jake Ryan’s book one of the 7 Best Books for Learning about Crypto and DeFi, Bitcoin matched its highest price of the year. While I’m not saying those two things are necessarily related, I am noting that Bitcoin broke $47,000 and, along with the general crypto markets, may well be poised to go much higher in Q2. Why might this be? War is certainly a part of it.

War and the Unlikely Ally

I’m not going to recount the obvious. Russia invaded the Ukraine (and, quite possibly, bit off more than they can chew.) I will begin by denouncing this act and noting our alignment with the Ukraine, who is showing the world what they are made of and further where their president, Zelensky, is also giving a master class in leadership. This could turn into an entire op-ed about this unspeakable act, but there are plenty of those around the world so I will just let this part sit for now and point to some unexpected impact of this unfortunate event that we all hope ends soon.

Crypto is now on the front lines. Us News and World Report states that the war is accelerating the adoption of Crypto Assets.  Donations are just one avenue of acceleration as the Ukrainian government has asked for support via crypto and has raised upwards of $100M in such donations. This is important. Let’s begin by setting the way-back machine to the year 2008 and note that the original goal of bitcoin was to create a frictionless payment network. In this case it seems we have just that as, for the first time in history, donations are now being made directly to the Ukrainian government. Alex Bornayokov, deputy minister for digital transformation stated “Today, crypto is playing a significant role in Ukraine’s defense” noting that it’s the speed in which cryptocurrency donations can be put to work that makes them useful.   Of course, there are many scams out there, so doing one’s homework is required; however Time, in partnership with NextAdvisor, has noted valid addresses posted by the Ukrainian Government, cross referenced with Mykhailo Fedorov, Vice Prime Minster of the Ukraine.

This is incredible. It puts funds in the hands of the government for their defense efforts virtually instantaneously, with no middlemen, where 100% of the funds actually go to work with immediate availability. This may be the best use case to date and many regular people as well as crypto heavies, notably Gavin Wood of Polkadot who donated $5M in DOT to the effort, have participated. Unsurprisingly, Newsweek covered the fact that Ukraine has legalized cryptocurrency, another massive step toward worldwide acceptance.

Then of course there is Russia, and the immediate protest to my pro-crypto comments above is “But Russia can do the same and sidestep sanctions!” This will require an entire blog dedicated to this subject and the potential impact of Russia adopting Bitcoin. I’m not going there. Yet. I will say that with regards to sidestepping sanctions the answer is no, not really. Last I checked the solicitors for Russian donations weren’t doing very well and those sitting on fat stacks of bitcoin weren’t in a hurry to push it over to the aggressor. I suppose this could change if China or another country made such a move but, in doing so, that would ultimately forward the notion that there is real utility and use for a frictionless payment system. Furthermore, such use almost impels China to legalize the asset, at which point I rest my case.

The reality is that any significant money movement would require participation from worldwide exchanges and nodes, many of whom are choosing to willingly participate in the sanctions. Let’s also remember that there are rigorous Know-Your-Customer (KYC) and Anti-Money-Laundering (AML) policies in place. In other words, separating fact-from-fiction, it’s just not that simple. Nasdaq comments We don’t have a system that will allow western banking to be sidestepped so easily, continuing to say “There’s not enough global (crypto) liquidity to support Russia’s needs” (as they conduct nearly $50 billion in foreign exchange transactions daily.) At this point I have to mention that there is a biproduct of sanctions that we’re going to have to deal with soon. By weaponizing the US Dollar, the West has forwarded the argument for world adoption of another reserve asset. With many predicting the imminent downfall of that same US Dollar, this argues a bullish case for crypto. Again, a topic for another blog.

Finally, we have to look at those hardest hit by war, the individual. On the personal level, crypto allows individuals that are non-combatants on both sides, all of whom are victims of this war, to have a financial lifeline. $50 or $100 in someone’s hands (instantaneously, phone-to-phone) could ultimately be the difference between life and death, and we’d be remiss to think that friends and family aren’t looking for ways to directly help those that are in desperate need lest they become collateral damage.

My point is everything that is happening in the East is actually creating argument after argument in support of crypto.

Mining with Gas

While the war is on the world stage, industry is doing what industry does and is innovating. To that end, many parties are looking at solutions for energy efficient bitcoin mining. Elon Musk and Michael Saylor famously formed the Bitcoin Mining Counsel back in 2021 and there is a new effort underway to lobby to change Bitcoin’s mining code as well. Ultimately, necessity is indeed the mother of invention and we believe, as Jake noted in his Newsweek article last year, Bitcoin could actually drive energy efficiency.

So, back in the mother of invention category, Business Insider profiled a novel approach being implemented by oil and gas companies. You see, one of the side effects of drilling for oil is that wells may produce natural gas that is generally just burned off and unused. Exxon and ConocoPhillips are now both piloting programs that allow this normally wasted gas to be used to power Bitcoin mining operations, which is not only cleaner, it is utilizing a resource that was previously wasted.

This is going to take a little effort to build out, but is just another example of solutions that are being implemented. As an aside, when big oil gets involved, this is just one more pillar in support of our growing asset class.

(US Government) Planning to Plan

The cult classic film “Office Space”, which lampoons the corporate workspace, has one of my favorite scenes in all of film. In this scene the “Bobs” are interviewing the protagonist Peter. That’s not the interesting part. The notable part of the scene, for me anyway, is the board in the background denoting the corporate mandate “Planning to Plan”.

As if to lend validity to this absurdity, the Biden Administration recently came out with its much-anticipated missive regarding crypto-regulation. I’ll paraphrase key points: “Crypto is a thing. We need to figure out how to deal with it. We’ll announce more later.”

So, basically, a big, fat nothing-burger. Of course, the government is trying to figure out how to handle this new world and we do have more and more guardrails for it on an almost monthly basis.  I am afraid, however, that the only thing this “planning to plan” moment has done is prevented our government from falling off a cliff of no return and at least identified that they have to get with it. At least this acknowledges that it is on their radar, and with some luck, this will lend to sane regulation later.

Is Soccer the Harbinger of Adoption?

Meanwhile, on the participation front, fútbol’s (that’s soccer in the US) great Lionel Messi has signed a $20 million deal to promote crypto fan token firm Socios. This is in anticipation for the pending World Cup, Fútbol’s global reckoning, which is happening in Qatar in November. Just to be clear, Socios is a fan token that allows holders to vote on (generally minor) decisions for teams. What is unique about this is that they allow actual real, tangible fan participation. This may seem trivial but, when coupled with Tom Brady’s endorsement of trading platform FTX and LeBron James’ partnership with Crypto.com, it shows a very interesting trendline. These athletes aren’t inexpensive. They are the creme-de-la-crème. They are putting their name to the industry. Yes, it’s all marketing – but last I checked marketing plays a pretty big role in the adoption of anything and please remember that Pew Research noted that only about 16% of all US adults have exposure to crypto. I think the number is actually higher but, in any case, that number is undoubtedly about to change significantly.

In Closing

There’s so much more happening but I don’t want to diffuse the primary topic of this month’s missive. War, regretfully, is real, and this current war is impelling an incredibly bullish case for crypto. While we think the next quarter is very likely to be positive ground taken in this current bull run (yes, we’re still in a bull run) it doesn’t really matter what any given month or quarter does. Crypto, like the internet, is a technology breakthrough and with all such breakthroughs we measure success over the span of years, not months. Early adoption is almost over though, so if ever there was a time to get serious about this market, I would argue that time is nigh.

Until next month take care, be safe, and I’ll be sure to keep Decrypting:Crypto for you!

About the author James Diorio

James is a Principal and Chief Executive Officer of Tradecraft Capital.