Russia’s war on Ukraine has triggered a big discussion around “reserves”. 

What is a reserve asset? 

It should be an asset that you can utilize strategically, or when times are tough. It is a government’s “war chest” that can be used to protect the country or its interests from external or internal threats. 

After World War II, the 44 governments created the Bretton-Woods treaty in July 1944.  The group had the goal of “creating a new international monetary system that would draw on the lessons of the previous gold standards and the experience of the Great Depression - and provide for post-war reconstruction.”

In simple terms, the treaty set the U.S. dollar as the reserve currency, with a fixed peg to gold. Every other currency, in turn, had a peg to the U.S. dollar. 

In 1971, U.S. president Richard Nixon ended the dollar’s convertibility to gold - effectively ending the Bretton-Woods treaty.

Since that change in 1971, international governments have been slow to adjust, and they continued holding their reserves in other countries’ currencies - and limited amounts of gold. Many times, the gold held in one country’s reserves is physically stored in vaults outside of that country.

The world had not seen an international conflict of this scale since the Bretton-Woods agreement came to an end in around 1971. 

In other words, holding your reserves in another country’s currency or bonds had not been a global issue - until a few weeks ago.

The world has been quick to notice this downfall, and a new narrative has been quickly developing. 

“Are your foreign currency reserves really safe?”

The article by the Wall Street Journal above did not mention the word “bitcoin”, but it might as well have been an advertisement for it. 

Bill Miller was a lot more explicit in a recent interview “Maybe we should have something else out there, that other countries can't harm us with, and that is impervious to inflation or to being manufactured in greater quantities.. this is bullish for Bitcoin” he said in an interview last week. 

Now, let’s look at how bitcoin has been behaving relative to other asset prices since the conflict began on February 24th:

Comparing bitcoin against a spectrum of assets based on their relative perceived risk we see that their performance ranks in the following order:

1. Gold +4.84%
2. U.S. Dollar index +3.27%
3. Bitcoin -1.05%
4. S&P 500 -1.50%
5. ARK Invest Innovation ETF -5.86%
6. FTX Decentralized Finance Token Index -6.87%

Through that lens, we see that bitcoin has been faring quite favourably given the current backdrop.

Anything can happen during an active conflict, and regardless of what market indicators might say, investors should stay on their toes.

Additionally, the much-anticipated executive order to regulate crypto out of the White House is rumoured to be signed this week.

It is unclear what the exact scope of the order will be, however - bitcoin has a relatively clear framework in the U.S.. The bill would most likely have a bigger impact on services or protocols that do not conduct KYC/AML checks - more on this in our DeFi section.

And we sign off on this week’s bitcoin section by celebrating a new all-time high in addresses with non-zero balances for the Bitcoin network. 

As you can see from the chart, the growth has been consistent over the last 12 years and we have now surpassed more than 40 million addresses with non-zero balances.

U.S. Equity markets have been under pressure over the last week as the conflict continues to take its toll on all sorts of companies, from energy to finances, to agriculture, to tech - it will take time for companies, and investors, to fully assess the damage. 

This week we get the February inflation report for the U.S. - this is very relevant as the Fed celebrates its March FOMC meeting next week. Investors expect that the Fed will raise the overnight interest rate by 25 BPS. Just a few weeks ago investors were pricing a 99% probability of a 50 BPS rate hike. That has been quickly reverted due to the conflict. 

If you have filled up your tank recently, you probably know just how insane the increase in oil prices has been recently. 

Oil prices are approaching record highs, and gasoline prices have reached record prices in countries like Canada and parts of Europe. 

This will certainly have an impact on consumer confidence, disposable income, and ultimately, corporate profits. 

Markets will likely continue to be under pressure. If history is any indication, sanctions are quick to be enacted, but take a very long time to be removed. Same with active conflicts - they are easier to start than to stop.

Markets can remain under pressure as companies continue to assess the implications/damage from the active conflict in the weeks ahead (whether by sanctions or supply chain disruptions). If the Fed has to announce a rate increase into an escalation of the conflict, things could accelerate until something changes. 

Investors should remain on their toes in the weeks ahead.

Gold had it’s best week of the year so far, closing higher by +4.33% and up almost another ~1% so far this week.

We are now seeing the “flight to safety” phenomenon start to play out. The U.S. dollar also had it’s best week of the year, up +2.04%. This shows that investors are now starting to look for refuge under so much uncertainty. 

Gold is within ~$100 of its all-time high of $2,075/oz. Given the current geopolitical environment, it would not be surprising if gold were to reach and surpass that level in the weeks ahead.

To keep things in perspective, gold has a market capitalization of $12.7 Trillion. A ~6% increase in price would equate to about the entire market capitalization of Bitcoin.

Both the DeFi index and ethereum finished the week lower by -2.90% and -2.62% respectively. 

The week was also eventful in terms of news. First up, a legendary DeFi developer announced he and his partner will be retiring. 

Andre Cronje, dubbed “The Godfather of DeFi”, announced via Twitter that he will stop contributing to projects soon. Cronje was the developer behind Yearn Finance - an incentive mining protocol that kicked off the “summer of DeFi” in 2020. 

He will stop contributing to about ~25 decentralized finance applications. 

Additionally, we also saw that OpenSea and MetaMask, two “decentralized” protocols on Ethereum, announced last week that they had started restricting IPs from users in certain countries. 

Ironically, the Vice article above didn’t even refer to the protocols as “decentralized”, opting for the term “Ethereum Companies”. 

Internauts were quick to question how “decentralized” these protocols truly are. 

As we mentioned in last week’s issue - given the current geopolitical environment and the rumoured Executive Order to regulate crypto, “decentralized protocols” based in the U.S. that do not KYC their users are likely looking for answers ahead of potential questions from regulators. Expect for this trend and types of announcements to continue. 

Also on the regulatory front, Bloomberg reported last week that the SEC was probing parts of the NFT industry - requesting more information to determine whether certain NFTs should be regulated as securities.

The article mentions that the NFT is particularly interested in fractional NFTs (artwork that is broken down into multiple units and then sold) - and into some NFT projects that could allegedly have sold art in order to raise funds for their company.

This trend also looks poised to continue given the current environment.

The last difficulty adjustment kicked in last week, dropping Bitcoin mining’s difficulty to 27 THs - and the next adjustment is projected to bring difficulty down by -1.89%.

It is not surprising to see hashrate take a breather in the face of the current conflict. In fact, given how much mining capacity is in Russia, it is surprising that more hashing power has not yet gone off-line. It is likely that some large scale miners in Russia are looking for options to reallocate as we write this.

The mempool has seen some glimpses of activity since the invasion started on the 24th - however, activity is still relatively low compared to historical highs. 

There might be bitcoin-mining related news out of Europe in the coming week, given the enormous changes in energy prices and geopolitical uncertainty. 

The crown-jewel of economic data in the week ahead will be Thursday’s U.S. inflation report. U.S. inflation hit 7.5% in January -and the market was effectively pricing the Federal Reserve would have to increase interest rates by 50 basis points in their March 14th meeting. The market has since “recalibrated” and now is only expecting the Fed to increase interest rates by 25 BPS. 

The Fed is in a tricky position, as the current surge in energy prices and commodities will certainly re-introduce price shocks for food and fuel.

Increasing the rate by 25 basis points might be their only option. If they do nothing, they risk inflation and asset prices soaring back. If they tighten too much in the current environment, they inflict significant damage to the U.S. economy. 

Inflation data from this week will certainly inform the Fed’s view. Look for the market to react to the data announcement on Thursday. The expectation is for inflation to have accelerated to 7.8% in February. 

Something else to keep in mind this week are the rumours that the Executive Order out of the White House to regulate crypto could be coming any day now. Crypto asset prices will certainly react to the news based on the scope of the order.

We hope you enjoyed reading and as always, we wrap up with a summary of the upcoming economic data and earnings reports for the week:

Thursday:

8.30 AM EST - Consumer Price Index in the U.S. (February)

2.00 PM EST - U.S. Federal Budget Deficit (Expectation is for a deficit of -311 Billion). 

Friday:

10.00 AM EST -U.S. 5-year inflation expectations. Analysts expect it to come in at 3%. 

It's a big week coming up, and as always, we'll keep you posted on any relevant news throughout the week right here and from our Twitter account.