In my estimation, armed conflict is not a positive for cryptocurrencies as it might be for precious metals. While the latter consistently benefits from the fear trade, the former is largely tied to economic pursuits – just in a decentralized manner. Therefore, I didn’t have the highest expectations for Polkadot (DOT-USD) when tensions in Eastern Europe ran red hot.
But that’s where the shock-and-awe treatment had me forgetting about the sanctions – ah yes, the sanctions. As the Biden administration promised, Russia would suffer severe financial penalties if it invaded Ukraine. The Russians moved in, forcing the White House to make good on its warnings.
Initially, the circumstances appeared ominous for Polkadot and other cryptos.
However, because of the unexpected resistance that Ukrainian soldiers put up – along with President Volodymyr Zelensky unparalleled bravery – the U.S. and western allies took the ultimate step of removing certain Russian banks from the SWIFT global payments network. All of a sudden, the ruble, which had already lost significant value, was facing the possibility of hyperinflation.
To be sure, the bank runs that ensued saw everyday Russian citizens pull out cash and/or exchange it or hard currency. But a number of folks likely diverted their funds to various cryptos, perhaps including Polkadot. At that point, almost any worthwhile digital asset was a better choice than staying in rubles, which may soon get pummeled.
As well, you can make the argument that Polkadot is a utilitarian crypto. More than just a peer-to-peer mechanism, DOT represents what’s known as an open-source sharded multichain protocol, which is exactly what it sounds like – a platform that unites multiple specialized blockchains into a cohesive, scalable network.
So, exposure to Polkadot is more than just banking on capital return potential: you’re supporting broader blockchain applications.
Look to the Fed to See Where Polkadot May Go
While the sanctions and the de-listing from SWIFT may be the immediate catalyst for the virtual currency sector, Polkadot itself might be more dependent on the Federal Reserve than reactions regarding economic penalties.
For one thing, the number of crypto investors in Russia is approximately 17.3 million people, or 11.9% of the population. It’s a significant figure, don’t get me wrong but it’s not 50%. Because crypto investors are still in the minority, it’s no wonder that many if not most Russians sought the safety and stability of hard (fiat) currencies, not virtual ones.
And if newbies were to seek shelter in cryptos, you’d expect them to go with the mainstream established names. While Polkadot has gained significant awareness over the years, it’s mostly popular with those who are already blockchain advocates. So, the Fed might have the final word, which is somewhat concerning.
As you’re probably aware, Russia’s central bank raised benchmark interest rates to 20% from 9.5% as a desperate measure to maintain the relative stability of the ruble in the face of sanctions. While the Fed probably won’t have to raise rates that high, the backdrop is rather alarming.
Before the crisis in Ukraine, consumer inflation has been soaring. With tensions between the west and Russia presumably at an all-time high (maybe the Cuban missile crisis was worse?), crude oil is likely to rise higher and higher. Therefore, it’s possible that the Fed has to take serious action to get inflation under control.
While the Fed has signaled it will carefully raise rates, I’m not sure if it has the luxury of pensiveness. For instance, the ridiculous price for gasoline is angering everyday Americans. I’m certain most would rather see lower crypto valuations in exchange for lower costs across the board.
Going the Other Way is Doubtful
I suppose it’s possible that the Fed could go the other way in response to economic conditions that have unexpectedly gone awry, especially if the geopolitical flashpoint takes a disturbing turn. While I’m not going to discount that scenario, we might have other things to worry about besides the valuation of Polkadot in that situation.
No, in my mind, the realistic scenario is that the Fed has to mimic somewhat the Russian central bank’s actions. Per the Pew Research Center, only about 16% of Americans have used cryptos. Therefore, when it comes to pleasing the American people or placating crypto investors, it’s an easy choice.
That’s not to say that Polkadot is doomed. If the Fed stays the course with its conservative rate hikes, DOT might benefit broader interest in cryptos. Still, since domestic pressure is sky high for our central bank to do something about soaring prices, I would simply approach DOT with an abundance of caution.
On the date of publication, Josh Enomoto did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
