Market Turmoil: War, Inflation, and Crypto's Rising Role

Market Outlook

It’s been a hard week for the markets as the Russian invasion of Ukraine prepares for its third week, killing at least 474 civilians. Other macroeconomic triggers include the Federal Reserve’s infamous interest rate hike to curb inflation which is at its 40-year-high now. The hike is expected to float at 0.25%; a decision is scheduled to be made on March 16. Another related trigger that’s been affecting the markets is the Consumer Price Index which will also be affected by next week’s interest rate hike, which will essentially track how much consumers will be impacted in terms of loans, investments, savings, job prospects, and prices for goods and services. In consequence, Bitcoin is down by 6.4%, Ethereum is down by 8.5%, equity 3.5% over the past week. Meanwhile, oil and wheat have surged historically as the breadbasket of the world continues to bleed.

As it appears in the chart below, the correlation is rising above the 0.3 mark, indicating that Bitcoin and S&P 500 are historically in higher correlation, however, it’s still weak.

There are undoubtedly opportunistic inflows into commodities, including palladium and gold, which reached all-time highs in light of the Russo-Ukrainian conflict, of which capital likely came out of the equity market. As discussed previously, Bitcoin's dominant use case in the past couple of weeks has been to serve as a neutral and non-sovereign payment alternative to support the Ukrainian government. It's clearly time for Bitcoin to shine as a non-state, non-sovereign, and emerging store of value — and this decade has clearly been battle-testing this thesis.

Crypto in the Russo-Ukrainian Conflict

The Ukrainian government decided to cancel the airdrop of its token after the announcement of Peaceful World tokens (WORLD), which was later realized as a “spoof” token with a circulating supply mimicking the world’s population at 7B. The Ukraine wallet then appeared to send nearly a million WORLDs to a wallet that used the tokens to seed a liquidity pool on Uniswap. Blockchain analysts were skeptical of the incident since the Ukraine wallet never directly interacted with the tokens.

At the time of writing, it appears that there have been 2,277 WORLD transfers made and Etherscan displayed a warning that the token has been reported to have been used for misleading people into believing it was sent from a well-known address and maybe spam or phishing. Retreating from issuing fungible tokens, the Ukrainian government tweeted that it would drop some NFTs to support the Ukrainian army.

On the same philanthropic note, Uniswap added a new “Donate to Ukraine” feature to encourage ETH donations to the war-ridden country. The feature automatically exchanges any of Uniswap’s listed tokens to ETH for Ukraine.

Coinbase also announced that it had blocked more than 25,000 wallet addresses linked to Russian individuals or entities who are suspected of having engaged in illicit activity. Similarly, but with users based in another sanctioned state, OpenSea deactivated Iranian-based accounts without prior notice or explanation, on the back of the escalating conversation about sanctions. Moreover, two fundamental pieces of the Ethereum ecosystem, Infura and MetaMask, are restricting access to users in certain geographical areas, shying away from giving any specific details. At 21Shares, as noted in our State of Crypto magazine, the decentralization of the crypto web development layer will be key to unlock the full potential of Web 3. There are competitors and alternatives to inInfura such as Pocket Network attempting to become the TCP/IP of Web3 node infrastructure – a multi-chain relay protocol that incentivizes RPC nodes to provide DApps and their users with unstoppable Web3 access.

US Regulations

Amid concerns about Russia’s use of cryptocurrency to mitigate US sanctions, although very unlikely as discussed in our previous newsletter, US President Joe Biden is expected to sign an executive order this week directing the Justice Department, Treasury, and other agencies to study the legal and economic ramifications of creating a US central bank digital currency (CBDC). At 21Shares, we expect the US to speed up the execution of an All-American CBDC in order to counter the efforts China and Russia have made on that front to both evade sanctions and hedge against the US dollar hegemony.

Biden’s executive order has also been reported to direct federal agencies to examine potential regulatory changes, as well as the national security and economic impact of digital assets.

In other news, crypto payments infrastructure provider and stablecoin issuer Circle has delayed its DeFi application programming interface (API) product, citing the need for further regulatory guidance on its rollout. This is likely to be a cautionary response to avoid being in the situation of BlockFi, which was fined a whopping $100M last month.

Media Coverage

In the past couple of weeks, 21Shares experienced some noteworthy media attention. Our co-founder Ophelia Snyder got featured on Finews in an interview about her being under 30 and running one of the world's best-known startups in Zug's Crypto Valley.

“21Shares exists to make crypto accessible to everyone,” Finews quoted Ophelia. “Crypto has proven itself to be the best performing asset class over the past 10 years, and we believe it will continue to outperform for the next decade.”

On March 16, Ophelia is also taking part in Forbes’ Digital Assets and Web 3 Summit, alongside leaders from the Digital Dollar Project, Tezos, Cloudflare, Alchemy, and BNY Mellon.

“The pace of innovation in the sector is incredible and shows no signs of slowing,” she said in the Finews interview. “Our product suite will continue to expand to match that speed of innovation.”

Meanwhile, yesterday, our very own Director of Research Eliezer Ndinga joined Truffle 2022 as a speaker in a panel discussing investing in emerging and frontier markets as a catalyst for change.

Our Head of Sales and Distribution in the EMEA region, Isabelle Moessler was also featured on ETF Stream in a profile titled: 21Shares’ Moessler: More Education Needed in Crypto ETP Space. ​​“There is still a lot of education needed and the industry is still at such an early stage that when new developments and protocols emerge investors are not sure exactly how to evaluate the opportunities,” Isabelle told ETF Stream.

News - Bitcoin and Tether Will Be “De Facto” Legal Tenders in Lugano, Switzerland

What happened?

The Italian-speaking Swiss city of Lugano has partnered with stablecoin issuer Tether to establish Bitcoin, Tether, and Lugano's own LVGA Points token as a legal tender in the city.

This information was officially made public at the Plan B conference, hosted by Lugano’s mayor Michele Foletti. The move was described as a "de facto" legalization, as the Swiss franc will remain the official legal tender in Lugano as it is nat. Nevertheless, Lugano is aiming to have all of its businesses seamlessly use crypto for everyday transactions as well as for their taxes.

Why does it matter?

Switzerland has been advertising itself as the world’s “Crypto Valley" since it’s been supporting and encouraging crypto projects by providing them with crypto-friendly regulations. This news makes Lugano the first municipality to somewhat legalize Bitcoin in Europe. Blending crypto into business transactions, even if informally, counts as a leap towards adoption and proves that not only sanctioned states can benefit from crypto.

An increased crypto adoption within a given country makes crypto education proliferate between the masses which in essence benefits the country at large. As seen in Ukraine, a crypto-educated population and government are what really helped the war-ridden country to raise over $60M worth of crypto-assets in donations. At 21Shares, we can definitely see the end of this year assembling a union of crypto-adopting nations benefiting from the plethora of use cases of blockchain.