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Bitcoin: The Russian Gambit

Bitcoin, by its very design, lends itself very well to displace the US Dollar as an alternative global reserve currency. And it might be called upon to do so sooner than many of us might have imagined.

The turbulence in the current geopolitical scenario threatens to ramp up over 2019, given the distinctly idiosyncratic nature of global leadership in many of the major nation states, whether it be the US, China, Russia or various Middle Eastern, European and Latin American nations. The common theme is of a leadership by what media might sometimes euphemistically refer to as ‘strong men’.

A few weeks ago, we had opined on the imminent possibility of nation states at the receiving end of a Trump-led sanctions regime deciding to launch CBDCs or central bank digital currencies. Iran, especially after its ostracisation from the global SWIFT network is reputed to be working on a crypto version of its digital currency. Venezuela has already thrown its hat into the CBDC ring, albeit with the much-maligned and clumsily structured Petro. Among others, Russia is said to be following suit as well with its own crypto ‘Ruble’.

In this scenario, it is, therefore, a no-brainer that these nations states, in addition to investing heavily in exploring crypto versions of their currencies, will also look at diversifying their foreign exchanges reserves by investing in non-sovereign currencies like Bitcoin, in a bid to decrease their dependence on the US dollar. Sanction-hit countries such as Russia and Iran will be among the earliest to take the first step toward de-dollarization as their currencies are at the risk of significant devaluation, owing to the impact of US-sanctioned embargoes on their export/import operations and trade settlements.

In line with our prediction from a few months ago, Russia will now likely be the first major nation state to consider a coordinated, official investment program to acquire bitcoin. The move will be aimed squarely at fighting the detrimental effects of US sanctions, according to a Russian economist who reportedly has close ties to Kremlin. Needless to say, if the alleged rumor indeed turns out to be true, it will end up becoming a big boost for Bitcoin from an adoption standpoint. The high-impact, but hitherto theoretical use case of bitcoin being a non-sovereign reserve asset class for nation states looking for an alternative to dollar hegemony would have finally come to fruition, setting a template for many other nations states that might feel themselves wronged in the current global economy.

Regular followers of this newsletter might recall our earlier mention of a dystopian version of crypto singularity.

Russia currently holds close to $460Bn in foreign currency reserves and the country is reportedly expected to purchase approx. $10Bn in Bitcoin in the first quarter of 2019 itself. Incidentally, the price crash of 2018 might have made Bitcoin more attractive from a valuation standpoint for the Russians to consider investing on such a large scale. If you are wondering how big of an impact this might have on Bitcoin’s price, if Russia invests $10Bn as speculated, at current prices, it would own roughly 15% of the world’s Bitcoin in circulation at the moment. Of course, prices would jump up exponentially if Russia were to buy this $10Bn worth of Bitcoin, and it would require a concerted market making operation across markets over a period of time for the Russians to acquire this amount. Regardless, the move will be a testament to Bitcoin’s role in the modern world as an unseizable, uncensorable, non-sovereign currency.

Things will get really interesting if and when other countries follow suit and start buying bitcoin to diversify their foreign currency reserve base. At a 20% deployment into crypto by sanctioned nations, there could be over $140b worth of sovereign demand for BTC.

Figure 1: FX Reserves by Country for US-sanctioned Nations

Values in $Bn. Source: US Dept. of Treasury; (www.export.pitt.edu)

Figure 2: Potential Inflows into Bitcoin if Above Countries Start Investing a Portion of FX Reserves in Bitcoin

Values in $Bn

The analysis will of course get even more interesting as there is broad regime-mandated buying across nations, including those that are not necessarily sanctioned but just want to hold some crypto in their sovereign reserves. There is a network effect at play here. India and Iran, for instance already trade oil for other commodities, outside the petrodollar ambit of OPEC. There is nothing theoretically stopping them from settling trades in bitcoin, or monero or ZCash. It is not inconceivable that a number of regimes have already accumulated sizeable reserves of secrecy coins such as Monero and ZCash, or have plans to do so in the near future.

Meanwhile in Crypto Wonderland….

“Elections Canada May Allow Crypto Donations” According to iPolitics, the Canadian Electoral Body, Elections Canada, is looking to implement crypto donations for upcoming elections. The Electoral Body has issued a draft document laying the complete procedure for accepting cryptocurrency donations, along with finding the input of other parties about how can they handle such donations. According to the body, political entities have requested guidance on accepting contributions and conducting other transactions in bitcoin or altcoins”.

“Crypto Malware in Torrented Movie Files” Bleeping Computer has revealed malware hidden in movie torrent files designed to steal cryptocurrency from Windows computers. The malware uses a common .LNK file to launch a Power Shell command to inject some malicious code into a Firefox browser, adding links which attempt to phish a victim out of crypto. The virus is designed to search any webpage a user loads for Ethereum and Bitcoin addresses, and replace any with a new link to the hacker’s wallet. The virus also injects JavaScript code of its own onto well known websites to try to get users to fork over their crypto.

“ETC Attacker Returned $100k to Exchange” The Ethereum Classic 51 percent attacker has reportedly returned $100,000 to cryptocurrency exchange Gate.io. The company further noted that they tried contacting the attacker but didn’t get any reply until now, and that they do not know the reason why the funds have been returned. According to the exchange, “if the attacker didn’t run it for profit, he might be a white hacker who wanted to remind people the risks in blockchain consensus and hashing power security”.

“Ginco to Expand Mongolian Mining Facility”Despite the continued bear market, Japanese company Ginco has revealed its plan to increase the capacity of its mining facility in Mongolia from 600 to 1600 miners before the year ends. In an interview, the CEO, Yuma Furubayashi, expressed his optimism about his business’ future prospects. Also, apart from the mining unit addition plan, Furubayashi also mentioned spin-off project ideas, including repair services for mining devices.

Crypto Twitter Pick

What We’re Reading / Listening To

Deconstructing Decentralized Exchanges by Lindsay X. Lin

DEXes, Liquidity, and Arbitrage with Amir Bandeali of 0x and Ivan Bogatyy of Metastable

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