When Russia invaded Ukraine on Feb. 24, cryptocurrencies posted strong gains. Bitcoin rallied from $38,300 to $44,400, and Ether jumped to $3,000, up from $2,400.
But since March 2, crypto has come under pressure, and much of the gains have evaporated. The prices are also well off their all-time highs. In November, Bitcoin hit $68,990, and Ether reached $4,865.
Given that a growing number of clients are interested in crypto, advisors likely are getting questions about the impact of the invasion. So let’s consider some emerging dynamics:
What explains the recent moves with crypto? One driver for the initial rally is that crypto has characteristics of a safe haven like gold. A digital currency usually has a fixed number of coins, and there is no reliance on government-controlled monetary systems.
For example, if you live in Russia or Ukraine, you are likely worried about the value of your currency. You can easily transfer your savings to a cryptocurrency. This has happened in other countries with uncertain fiat currencies, such as Turkey.
Then why have cryptocurrencies fallen in value? Keep in mind that crypto is a growth asset that has experienced huge rallies in the past decade. Recently investors have unloaded growth assets as a way to reduce portfolio risk.
Extreme currency fluctuations in Russia and Ukraine help explain the demand for stablecoins. Unlike Bitcoin and similar cryptocurrencies, stablecoins are typically tied to reserve currencies, such as the U.S. dollar, and maintain a fixed value.
What about regulation? Crypto has provided benefits to those suffering in Ukraine. Elliptic reports $55 million in crypto-asset donations to the country.
But there are concerns that digital assets may allow Russia to evade sanctions. In a Congressional hearing, Sen. Elizabeth Warren (D., Mass.) said that the country was responsible for close to three-quarters of all ransomware payments last year. Much of this involves crypto.
With bipartisan support in Congress for Ukraine, the prospects for regulation are promising. This could involve audits and disclosures of stablecoins. But it would also mean increased compliance requirements for advisors who have clients who hold crypto.
In the meantime, the Biden Administration enacted an executive order on crypto. It requires federal agencies to study digital currencies and recommend regulations. There will also be an evaluation of issuing a digital U.S. dollar.
On the news of the executive order, Bitcoin soared nearly 9%. Investors were encouraged that it contained no imminent regulatory actions and more broadly, saw it as potentially legitimizing crypto as it noted positive aspects of the digital currencies. However, the gains in Bitcoin quickly fizzled.
Should advisors tell clients to avoid crypto? Keep in mind that Bitcoin emerged in early 2009. Unlike traditional assets like stocks and bonds, crypto has not been tested by long-term bear markets, depressions, sustained depressions, and world wars.
This means that there will likely be wrenching volatility. According to Bloomberg Intelligence commodities strategist Mike McGlone, Bitcoin is five times more volatile than stocks, over a 270-day average period.
In light of this—and the uncertainty of how long the Russian war will last— it’s important that advisors understand their clients risk tolerance and make sure that crypto doesn’t represent a concentrated part of the portfolio. For clients who aren’t yet in crypto, encouraging them to wait to buy until the extreme volatility of the current period has passed makes sense.
Tom Taulli is a freelance writer, author, and former broker. He is also an enrolled agent, which allows him to represent clients before the IRS.