Written by Antonio Liao, Researcher at BTSE
The answer to whether crypto investors should care about geopolitics or not is a resounding yes. As cryptocurrency adoption goes mainstream, geopolitics and the crypto market become more intertwined than ever.
If you are reading this article, you probably have seen a crypto chart before and noticed the peaks and troughs of crypto prices, thinking about how volatile the crypto market can be. You are right. The crypto market certainly appeals to those who are more risk-preferring, and the volatility is partly driven by an often-overlooked factor known as geopolitics.
Taking a step back, what is geopolitics? Geopolitics refers to the study of how factors such as geography, economics, and demography affect a government’s domestic and foreign policymaking.
Whether you are a hodler or active trader, it is crucial to keep in mind that geopolitics has more fundamental and far-reaching implications than fleeting fluctuations in the market.
Why Geopolitics Matters
Similar to other financial markets, such as stock and gold markets, crypto can also be susceptible to geopolitical volatility stemming from international conflicts or domestic political unrests.
Accounted for 18% of the global hash rate, Kazakhstan’s low energy cost, tax regulations, cold climate, and an expanse of land made the country a sanctuary for crypto mining. In January 2022, Kazakhstan’s domestic stability quickly deteriorated when the cost of electricity spiked, which sparked nationwide unrest that resulted in an internet shutdown. An internet blackout has been a common tactic to censor political dissent by authoritarian regimes such as that of Kazakhstan.
As a result of the blackout and suspended mining activities, BTC dipped by more than 10% and hovered around the $42,000 mark for the first time since September 2021. Soon after, Kazakhstan began cracking down on unregistered miners known as “Gray Miners,” and it is now mandating the remaining miners to regularly file status reports.
Prior to Kazakhstan’s emergence into a crypto mining sanctuary, China had been the world’s crypto mining powerhouse, accounting for a 46% global hash rate. However, ever since crypto adoption began to take off, Beijing has been vocal about crypto’s potential threat to the financial system, leading to various bans to clamp down on crypto adoption and cement its financial grip over time.
The crypto crackdown culminated in late 2021 when China finally introduced a sweeping ban on crypto mining and trading, which, ironically, did not come as a surprise to most people. Despite the rather muted effect the 2021 ban had on the price of Bitcoin, China’s transition from a crypto powerhouse to a sideliner epitomizes how geopolitics impacts a country’s regulatory approach to crypto.
Another example of how geopolitics impacts crypto is North Korea. The state resorts to decentralized digital assets like crypto as a source of funding, given the manifold sanctions. Equipped with a sophisticated cyber army, North Korea is accused of sponsoring numerous crypto exploits, with the most recent one being the $625 million Ronin exploit in March 2022.
As the geopolitical tension revolving around North Korea’s nuclear threat intensifies, so will the sanctions, hence an uptick in North Korean-sponsored crypto exploits.
The Evolving Role of Crypto amid Geopolitical Uncertainties
Regardless of what you consider crypto’s utilities may be, it is becoming harder to discount how far cryptocurrencies have come amid geopolitical uncertainties, particularly in cases where traditional finance is inaccessible or dysfunctional.
The case in point here is the ongoing Russian-Ukrainian conflict, in which both Russian and Ukrainian financial systems undergo significant destruction as a result. With Russia being expelled from major banking systems and Ukraine being on the brink of financial collapse, cryptos offer a lifeline to both countries.
Millions of dollars in crypto donations have poured into Ukraine to date, which has enabled Kyiv to monetize these donations to support its humanitarian and war efforts. Even more groundbreakingly, the Ukrainian government was able to quickly accept crypto donations once the conflict broke out, long before traditional donation channels became available.
On the other hand, the Russians turned to crypto to circumvent harsh international sanctions, as the ruble plummeted in the early stage of the war.
That said, it is not an overstatement to consider the Russian-Ukrainian conflict as the defining event in revolutionizing crypto’s role.
What Happens Next
Looking ahead, geopolitics will continue to pose manifold implications to the crypto market on both macro and micro levels.
On the macro level, the three most direct impacts that geopolitics can have on the crypto market are market fluctuation, regulatory shifts, and mass adoption.
On the micro level, we will see positive and negative implications spurred by the evolving geopolitical landscape, as shown by an uptick in state-sponsored attacks and the expanded real-life utility of crypto.
How to Mitigate Geopolitical Risks
At the end of the day, you do not have to be a political scientist or international affairs expert to stay abreast of global affairs and regulations. In fact, you might be seeing more geopolitical reporting on major crypto-themed news outlets, given how geopolitics become increasingly intertwined with the crypto market.
Regardless of your nationality, the security of your assets is of utmost importance, particularly during times of uncertainty. As geopolitical incidents become increasingly prevalent, the associated risk to your assets also increases, as evidenced by the ban on Russian wallets and North Korean attacks.
While risks cannot be avoided, it is important to know that they can be easily mitigated for the well-prepared. As a truly global exchange, BTSE aims to provide you not only with a seamless trading and earning experience, but also with updates on global developments to assist you with informed decision making. Stay tuned for more updates on the BTSE Blog as we help you navigate the crypto world.
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