How Recent Russia Developments Are Affecting Financial Markets
Equity markets were spooked by the announcement of a Russian invasion of Ukraine which led to lower prices on the morning of February 24th, 2022. Upon market open, the Dow Jones Industrial Average traded -1.3%, the Nasdaq traded -2.6%, Germany’s DAX traded -5%, and the U.K.’s FTSE traded -2.8%. By the time the U.S. markets closed, all indices recovered above or back to previous prices despite the news.
Bitcoin experienced the same market turbulence throughout the day by starting below $34,400 but later surged back above $38,000. It is likely that the recent price dip was due to the Russia and Ukraine news but other developments within the European Union have taken place recently.
On February 23rd, the European Union released a newly drafted Markets in Crypto-assets (MiCA) framework. The framework proposes that all proof-of-work digital assets (including Bitcoin) should be banned from the European Union by 2025. The proposal has not been passed yet but may have added to Bitcoin’s initial price drawdown for today.
CEO of FTX Exchange Sam Bankman-Fried found Bitcoin’s price fall to be unsurprising. In a Twitter thread, he agrees that Bitcoin is more correlated to equity markets now more than ever before.
Bankman-Fried is not alone in pointing out Bitcoin’s correlation to stocks. The number of people recognizing this development is growing and the hypothesis has held up for today’s events. However, the two markets are not 100% correlated. During certain time periods Bitcoin will follow stock market movements but will decouple during other days.
It is also fair to say that Bitcoin has only experienced a macro “bull” market since its inception in 2009 and has yet to see an elongated recession similar to prior equity cycles. This does not mean that Bitcoin will stay correlated with equities in the future but more macro events will continue to test this theory.
In response to the Russian invasion, President Biden announced new sanctions on Russian banks and “corrupt” billionaires. This action could possibly test the correlation theory if Bitcoin is considered a viable option for wealthy Russians.