If there were a time for Bitcoin (BTC -1.18%) to shine, a geopolitical crisis would seem to be it.
After all, Bitcoin's biggest backers argue that the cryptocurrency is a necessary alternative to fiat currency because central banks and governments can't be trusted and government-backed currencies lose value through inflation.
In theory, Bitcoin solves both of those problems as a decentralized currency on the blockchain with a mathematically limited supply at 21 million. In practice, it's not so simple.
When Russia invaded Ukraine on Wednesday night, the price of Bitcoin didn't jump as the bullish logic would suggest. Instead, it crashed, falling more than 4% in just 30 minutes.
It's true that Bitcoin recovered those losses later on Thursday, but that was only after other risk assets came storming back. The Nasdaq, for example, opened Thursday's session down 3.5% but finished up 3.3%, nearly a 1,000-point swing.
While risk assets like Bitcoin and tech stocks initially flopped, gold rallied, with spot prices jumping 3% as war broke out. Though Bitcoin bulls like to refer the world's largest cryptocurrency as "digital gold," the recent price action on Bitcoin belies that notion, showing that it isn't the safe haven asset it's often billed as.
At the same time, the Russian ruble fell in value by as much as 10% against the dollar, showing that even fiat currencies can easily be devalued, but if that movement was supposed to drive buying in Bitcoin, the opposite happened.
Image source: Getty Images.
A clear test case
Any currency tends to face its greatest test in times of strife. War and destruction often lead to devaluations or hyperinflation. Consider Germany after World War I, when the German mark was so worthless a single dollar equaled 1 trillion marks.
More recently, political and economic crises have supported the theory that Bitcoin can substitute for a weak national currency. In Venezuela, which has been racked by hyperinflation, locals have turned to Bitcoin as a way of protecting their own money, sending remittances, or maintaining cash flow for businesses. According to a 2020 report on the news site CoinDesk, Venezuela was by far the leading country in peer-to-peer cryptocurrency exchange, and hyperinflation there offers a clear explanation why.
Arguably, the expansion of fiat money supply during the pandemic helped drive the price surge in cryptocurrencies over the last year. MicroStrategy Chief Executive Officer Michael Saylor said his company now holds billions of dollars in Bitcoins on its balance sheet, instead of cash, because the expanding money supply early in the pandemic meant that the cash it was holding was a "rapidly melting ice cube." Saylor searched for an alternative to cash and decided that Bitcoin was the best one.
It's too early to know how or if the Russian invasion will affect adoption of Bitcoin, but there is some evidence that past economic crises have encouraged people to embrace it. With sanctions mounting against Russia and its stock market crashing, an economic crisis seems likely to follow. A drawn-out conflict could also send the Ukrainian economy spiraling.
What the crisis tells us about Bitcoin
Cryptocurrencies crashed as war broke out, and Bitcoin proved to be more stable than altcoins or even rival Ethereum, as the bulls would expect. But the crash, though fleeting, shows that Bitcoin remains a speculative asset that behaves more like meme coin Shiba Inu than as a substitute for gold.
That a geopolitical upheaval sent Bitcoin holders fleeing for safer assets, rather than causing them to double down on a currency that's supposed to be a solution to the problems with fiat currency, demonstrates that Bitcoin functions primarily as a form of speculation rather than a currency or safe haven. If that weren't true, investors wouldn't be afraid to hold it during uncertain times, and Bitcoin wouldn't be so volatile to begin with.
Still, it's worth paying attention to the crisis, as it presents the latest test case for Bitcoin. While the market's initial reaction undermines the bull case for Bitcoin, increased adoption of the cryptocurrency in the face of inflation or economic turmoil would support its long-term growth.
