Cryptocurrency markets basically crashed between last November and January of this year. Even several of the biggest cryptocurrencies based on market cap plunged more than 40%.
The worst might have seemed to be over headed into this month as many digital tokens bounced back. But geopolitical concerns caused the rebound to come to a screeching halt. Here's why the Russia-Ukraine conflict could cause another cryptocurrency crash.
A game of risk
At first glance, it might seem that the situation with Russia and Ukraine has nothing to do whatsoever with cryptocurrencies. After all, most digital tokens wouldn't experience any direct problems if the conflict worsens.
However, when the overall environment appears to become overly risky, many investors prefer to move their money into assets that offer more stability and safety. This is sometimes referred to as the "risk-off" trade.
A risk-off scenario began to unfold in late 2021 even before the escalation of tensions between Russia and Ukraine. It's why both growth stocks and cryptocurrencies fell significantly in recent months.
But the prospects of a conflict that escalates beyond words would likely especially make investors jittery. The potential aftermath of economic sanctions and increased global tension won't help matters either.
Different levels of crypto pain
Not every cryptocurrency will cause the same level of pain for investors in a full-blown risk-off market. For example, the most well-known and most widely used cryptocurrencies probably wouldn't decline nearly as much as others.
Bitcoin (BTC 2.27%) and Ether (ETH 0.29%) would likely hold up better than many digital tokens. They're the two largest cryptocurrencies based on market cap. With Ethereum's blockchain used widely to support smart contracts, its real-world utility could provide a cushion to some extent.
The most popular meme coins such as Shiba Inu (SHIB 4.69%) probably wouldn't fare as well as Bitcoin and Ether would. However, less well-known meme coins could get hit even harder.
Are there any cryptocurrencies that seem likely to weather the storm relatively well? Actually, yes. Stablecoins are pegged to fiat currencies. By design, they're intended to have relatively stable prices (hence the name).
The price of Tether (USDT 0.03%), for example, has barely moved in recent months while Bitcoin, Ether, and Shiba Inu have tanked. Tether is a stablecoin built on the Ethereum blockchain that's tied to the U.S. dollar.
However, even stablecoins aren't completely insulated from risks. Tether has come under fire in the past (and seen its price fall significantly) because of concerns about its balance sheet and claims that its digital coins are fully backed by U.S. dollar reserves.
Learning from the past
There are some important things that investors can learn from risk-off environments of the past. For one thing, they don't last forever. They can also present tremendous buying opportunities for assets that are well-positioned to come back strongly.
Different investors will probably have wildly different opinions about which cryptocurrencies are most likely to bounce back the most once the crisis is over. A good case could be made, though, that the cryptocurrencies with catalysts on the way should be in the best shape.
Ethereum, for example, is slated for a continuation of its major upgrade formerly known as Ethereum 2.0 this year. Shiba Inu investors anxiously await the launch of the Shibarium layer-2 solution.
It's also worth noting that some crises never actually materialize. Perhaps that could happen in this case. The stakes are high -- and not just for cryptocurrency investors.