The US conflict with Iran is changing attitudes towards cryptocurrency. Analysis

During the two-month conflict in the Middle East, the cryptocurrency market has transformed its behavior. Digital currencies stopped growing during the crises and began to behave like ordinary financial instruments that depend on oil prices and inflationary expectations. The fighting by the United States has also undermined Iran's position in mining, almost depriving the country of cryptocurrency production. How the conflict affected digital currencies is described in the Izvestia article.

How did the cryptocurrency behave in the crisis

• The conflict between the United States and Israel with Iran and the closure of the Strait of Hormuz, which caused the energy crisis, could not but become a factor affecting the state of the cryptocurrency market. Like all other markets, it experienced a shock and a drop in quotations on the very first day of the fighting. On February 28, the cost of Bitcoin dropped from $65,000 to $63,000, which looked especially threatening against the background of the long-term decline of the cryptocurrency.

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• However, the correction turned out to be shallow, and soon the price returned to pre-war values, simultaneously rising above the level of $66.7 thousand. While oil prices were steadily moving towards $100 per barrel and reaching a twofold increase, Bitcoin no longer collapsed, although there was no noticeable growth behind it either. In March, the price of the cryptocurrency was fixed in the range of $ 66-71 thousand and did not break out of it.

• In April, Bitcoin's behavior began to change. Its value has become quite accurately correlated with the news about a possible truce and the opening of the Strait of Hormuz. Each encouraging headline led to the growth of Bitcoin up to $ 77 thousand, and each message about the failure of negotiations led to a fall. At the same time, the impact of each event became less and less noticeable, and fluctuations in the exchange rate were usually eliminated within one to three days.

How the role of cryptocurrency is changing

• This behavior is unusual for cryptocurrencies. Many investors treat them, especially Bitcoin, as defensive assets that hedge risks in times of crisis. In this regard, the role of digital currencies is similar to gold, which is growing against the background of declines in traditional assets such as securities and bonds. The previous shocks of recent years have led to the explosive growth of Bitcoin, and appeasement on the platforms has adjusted its value.

• Now cryptocurrencies behave like other investment assets, which are directly dependent on the news background and macro-financial indicators. Investors note an almost 85 percent correlation between Bitcoin and the NASDAQ index of technology companies, which is sensitive to economic indicators and growing at a quiet time for risky investments.

• The current picture reflects a change in views on cryptocurrency. If it used to be called digital gold, now this nickname does not justify itself. High inflation expectations caused by the rapid rise in oil prices have brought back the anticipation of high interest rates and overwhelmed many financial assets, including digital ones.

• At the same time, in the long term, Bitcoin can still act as a hedge. During the conflict, its value outstripped both gold and stock quotes. However, he loses his straightforwardness and is exposed to risky short-term sales, which are being pushed by a growing share of institutional investors. Thanks to them, capital inflows into the cryptocurrency, including during the current crisis, have such an impact on its nature and lead to volatility, which is well known to investors in other assets.

How Cryptocurrency Mining is Changing

• The cost of cryptocurrency is also affected by mining, which has undergone its own changes during the conflict. Before the fighting, Iran provided about 4.2% of global Bitcoin production due to particularly favorable conditions — mining was legalized in the country, its operators can receive subsidized electricity in exchange for selling part of the mined assets to the central bank. According to some estimates, the Iranian miners managed to make a profit of 98%.

• However, the war with the United States has significantly undermined the entire cryptocurrency mining industry. Most of the mining rigs were shut down due to damage to the power grid, and the profitability of the entire industry fell by double-digit percentages. The drop in production was promptly compensated by American operators, and therefore the loss of Iranian capacity did not have a serious impact on the value of Bitcoin, but at the moment it was this factor that could lead to unexpected fluctuations.

• It will be extremely difficult for Iran to regain its mining position in the current circumstances. Without a full-fledged peace agreement in the White House, a plan for strikes on energy infrastructure remains relevant, which will destroy the remnants of the mining industry. In addition, Washington does not waive secondary sanctions for the supply of components. Iran's problems are opening up opportunities for other countries to expand their mining capacities in the coming months.