Ethereum Might Have to Play a Round of Russian Roulette

  • Ethereum (ETH-USD) has been making a comeback which is greatly encouraging.
  • However, ETH-USD may depend on geopolitical factors well outside its control.
  • It’s not good to bet against a crypto rally but you should be careful.
Landscape art with the Ethereum
Source: shutterstock

Printing some of the most vexing charts in the global capital markets, Ethereum (ETH-USD) seemingly has a split personality. Prior to the recent shot of momentum, ETH-USD — the second-biggest cryptocurrency by market capitalization — struggled under the weight of multiple headwinds. However, investors today are wondering which narrative is the real deal for the beloved digital asset.

It’s complicated. But I’m here to attempt a breakdown.

Prior to the Russian attack on Ukraine, arguably the biggest concern for Ethereum was the U.S. Federal Reserve. Seemingly determined to pop inflation-fueled asset bubbles for the sake of broader economic stability, the great central bank signaled multiple rate hikes in 2022 and perhaps beyond. That was a signal for investors to exit ETH-USD and other risk-on assets, including growth-oriented technology stocks.

Of course, the Russian invasion then introduced another critical setback: the disruption of the modern global order that eschews military action for diplomacy. Suddenly, vulnerabilities that few nations thought about were suddenly laid bare, which eventually hurt Ethereum and other cryptos. Stability, as we found out, carries an underappreciated premium.

Still, the outbreak of violence also demonstrated the premium in decentralized financial applications. And this too was a major part of the fundamental discussion over ETH-USD and particularly utilitarian blockchain networks.

I told you this was complicated.

ETH-USD Ethereum $3,436.05

The Initial Rise of the Fundamental Case for Ethereum

While Ethereum traded around the $2,600 level or below for much of the Russian invasion, ETH-USD also spiked its head briefly above $3,000 in early March. Part of the reason revolves around the sudden relevance of decentralized financial protocols.

As you know, the U.S. and its allies across the world imposed unprecedented levels of sanctions against Russia. Even Switzerland, which historically has stayed neutral in international conflicts, joined in with imposing economic penalties. With Moscow essentially isolated from the global fiat network — which of course runs on the U.S. dollar — the case for Ethereum took on a cynical twist.

Since cryptos are not tied to central authorities but rather operate on distributed consensus, it’s difficult to stop people from storing and transacting their wealth via digital assets. Sure, you can stop major exchanges from hosting certain individuals. However, people easily have the option of storing cryptos in cold storage wallets which can sidestep sanctions.

To be clear, almost all cryptos benefit from this cynical tailwind. However, Ethereum enjoys an advantage over others because of its recognized brand. If you’re new to crypto because you’re desperate to spare your wealth from sanctions and hyperinflation, you’ll probably pick the asset that has the most overall volume or the highest reputation.

Recovering Ruble Might Complicate Matters

Interestingly, as early stage peace talks between Ukraine and Russia occurred, many investors interpreted this as a sign that a resolution can materialize. I don’t think anyone believes the war will end tomorrow. However, just the idea that the representatives of the two sides are willing to discuss a workable solution is a major step forward.

Around the same time, the ruble started rising in value, basically matching the point now where it once was just prior to the invasion. No one knows if the ruble will stay elevated or rise even higher. However, the above peace talks may have contributed to the optimism.

In addition, the Wall Street Journal pointed out that Moscow implemented extreme measures to bolster the ruble, including imposing capital controls and raising the benchmark interest rate to 20% from 9.5%. More recently, the Russians demanded that foreign countries (that imposed sanctions) pay for their oil in rubles.

But should the ruble rise robustly and consistently from here on out, Ethereum and other cryptos might lose the immediacy factor in owing decentralized assets. It just comes down to basic economics. If the ruble is rising in value, you might want to redirect your wealth there, considering that Russia — despite being sanctioned to death — is still a productive economy.

On the other hand, cryptos are essentially tied to glorified database software.

Which Russia Is Going to Show Up?

Perhaps the question isn’t so much about which narrative for Ethereum will show up. Rather, it’s which version of Russia will dominate international affairs. Will it be the Russia that wants to finally join everyone else in the 21st century? Or will it be the revanchist rogue state that claims to stand against alleged Western imperialism?

But the problem with Moscow invading Ukraine is again the disruption of the modern global order. For cryptos to continue rising, the incentive for decentralization must be present and powerful. Nothing motivates a quick and radical adoption of cryptos than the threat that your fiat-based wealth could evaporate overnight.

However, if Russia basically sues for peace, stability will presumably return. That could end up bolstering fiat-based ecosystems, which might impose challenges for Ethereum and its rivals.

Personally, I think we’re some time from a peaceful resolution in Ukraine. Therefore, the uncertainty may help lift Ethereum. Still, it’s best to be on your toes no matter what your thesis.

On the date of publication, Josh Enomoto held a LONG position in ETH. The opinions expressed in this article are those of the writer, subject to the Publishing Guidelines.

A former senior business analyst for Sony Electronics, Josh Enomoto has helped broker major contracts with Fortune Global 500 companies. Over the past several years, he has delivered unique, critical insights for the investment markets, as well as various other industries including legal, construction management, and healthcare.

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