February 25, 2022
Access our research on the Bloomberg Terminal with ERH GXY <GO>

If this email was forwarded to you and you would like to sign up to receive it regularly, click here.
gm -

this was a wild week for the world and global markets with the russian invasion of ukraine. i write extensively about this at the bottom of this email in a new section called letter from the editor, which will appear periodically and contain opinion on markets and current events. this week i write about russia and ukraine, what the events say about the state of the dollar as the world's reserve currency, and what it all means for bitcoin and the future of money. scroll to the bottom to read that essay.

we also cover a fascinating integration for phantom wallet (i.e. "solana's metamask"), the withdrawal of a cryptopunks collection from a sotheby's auction, and changes to the reserve composition of the world's largest stablecoin.

wishing you and your families a safe and happy weekend,
alex
Market Update
The total implied network value (market cap) of the digital assets market stands at $1.66tn, down 9.2% from last week (when it stood at $1.83tn). Bitcoin’s network value is 6% of gold’s market cap. Over the last 7 days, BTC is down 1.5%, ETH is down 2.5%, and LUNA is up 32.7%. Bitcoin dominance is 45%, up 3 percentage points from last week.
Data current as of 8:58 AM ET on February 25, 2022. Prices and Data via Messari.
Three Big Stories
⚖️ Stablecoins Become More Stable
Tether and Anchor update composition of reserve assets. Tether's latest reserves attestation shows reduced risk profile for USDT. Consolidated reserve assets totaled $79bn at 2021 year-end, up 14% from the previous quarter. Tether reduced its holdings of commercial paper by 21% q/q to $24bn (representing 31% of reserve assets vs. 44% as of 9/30/21) in favor of a higher mix of money market funds and treasury bills. 
Separately, Luna Foundation Guard ("LFG") established $1bn BTC reserve for UST stablecoin. LFG raised the funds in a private sale of Terra's native token LUNA led by Jump Crypto and Three Arrows Capital, and included participation from DeFiance Capital, Republic Capital, GSR, Tribe Capital, and others. The LUNA investments are subjected to a four-year vesting period. The bitcoin-denominated UST forex reserve was established to add another layer of support to maintain UST's peg during contractionary cycles or when there are heightened levels of redemptions.

Unlike collateralized stablecoins such as USDC or USDT, UST is an algorithmic stablecoin that maintains its dollar-peg by using LUNA tokens to balance supply--network participants are incentivized to burn UST and mint LUNA when the value of UST falls below $1 or vice versa when its value rises above $1. In a hypothetical bank-run scenario where arbitrageurs are not incentivized or unable to maintain UST's peg through this mechanism, the new forex reserve serves as another backstop. The reserves will initially hold bitcoin, which LFG considers to be less correlated to the Terra ecosystem. The group plans to share more details on the decentralized reserve's design in coming weeks.
OUR TAKE: These events provide reassurances to USDT and UST, respectively the #1 and #4 largest stablecoins, which have collectively faced increased levels of regulatory scrutiny over recent months. Tether has been criticized consistently for misrepresenting the nature of its reserves, which some critics have speculated to include a meaningful amount in speculative debt assets including forms of Evergrande debt. The latest reserves attestation doesn't necessarily rule that out, but it does reveal a meaningful improvement to its risk-profile from the prior quarter and continues the de-risking trend from when Tether first started providing these reports. Commercial paper and certificates of deposit, the most scrutinized line item in its reserves, now represent just 31% of total reserve assets, which is a stark drop off from 65% reported just last May.

Stablecoin issuers still lack a standardized form of auditing for their reserves but some companies have taken proactive measures to provide greater investor assurances behind their reserves - including Kraken with its proof of reserves audits, or Circle and Paxos, committing to 100% cash and cash equivalent backings. Tether seems to be moving along a similar path, albeit at a slower pace than its US-based competitors. Still, market participants appear undeterred by the controversy surrounding its reserves as USDT remains the most widely-issued stablecoin by a large margin.

Meanwhile, supporters of UST, the LUNA ecosystem’s stablecoin, have taken up their own proactive measures to assure stability in the peg, even though algorithmic stablecoins like UST and DAI are not expected to fall under the same regulatory framework as their centralized counterparts. At a $12.5bn market cap, UST has demonstrated its ability to maintain its peg with wide usage and through market volatility. The establishment of a forex reserve for UST sets a strong example for other stablecoins to follow in order to inspire the trust from builders, investors, regulators, and other observers.

The initial funding of the UST forex reserve locks up LUNA over a four-year vesting schedule, demonstrating the long-term conviction in LUNA and the Terra ecosystem held by some of the industry's top-tier investors, which bought at $51 per token. LFG's decision to denominate its reserves using bitcoin also reinforces bitcoin's role as a treasury reserve asset. Many treasurers of enterprises, nation states, and DeFi protocols have invested in bitcoin for its diversification benefits. As a network, Bitcoin may not have a strong DeFi ecosystem, but as an asset, bitcoin is demonstrating its importance in DeFi.
🔐 1Password x Phantom
1Password’s integration with Phantom Wallet seeks to refine the user experience of non-custodial crypto wallets. 1Password’s new feature, dubbed “Save in 1Password” is an API that integrates directly with Phantom Wallet (A popular Solana wallet recently valued at $1.2B) to allow users to store their seed phrase (a human-readable format of their wallet’s private keys) with the click of a button. Previously, particularly during onboarding, users were prompted to write-down their seed phrase on a piece of paper and store these private keys offline. What ended up happening was some users would adopt sub-standard approaches, such as taking a screenshot or forgetting to write down the seed phrase altogether. With Save in 1Password users have the convenience of moving through the wallet onboarding quickly while ensuring that their credentials to access the wallet are safely stored in the same place as all of their other passwords.

To use this new integration, users will need both Phantom’s browser extension and 1Password’s browser extension (currently 1Password costs $2.99 per month). Starting with this Phantom wallet integration, 1Password will also have a “Crypto Wallet” field data type that is optimized for storing seed phrases (regardless of wallet provider). This signals a long-term intent to continue building products with a crypto-centric use-case. It’s also interesting to note that Apple, well-known for its emphasis on privacy, security, and secrecy, selected 1Password as its vendor-of-choice to deploy to all 123,000 of its employees worldwide. (There were even rumors Apple made a $100M offer to purchase 1Password, but those rumors are contested).
OUR TAKE: As the world increasingly shifts towards an “account-less” web3 model, cryptographic key-management may spell the difference between economic prosperity or financial despair. According to data from Chainalysis, around 20 percent of all 18.5 million circulating Bitcoin, worth $660B at today’s prices, appears to be lost or stranded in wallets — primarily due to forgotten private keys controlling the trapped funds. The reason so much money in crypto has seemingly been “lost” is because the technological underpinnings of cryptocurrencies have no concept of assisting users recover/reset forgotten passwords (unlike those of the traditional financial system).

The killer-feature of blockchains is that users have true self-sovereignty over their digital bearer assets. In other words, no central party can intervene on behalf of users to unlock/lock their accounts. Specifically, the private keys, which are needed to move funds, are only known by the user when they initially signed up for their crypto wallet. However, this feature can be a double-edged sword as humans are generally very bad at remembering passwords. 1Password’s integration with Phantom wallet appears to be the answer to this UI/UX nightmare.

While1Password is far from being the only password available manager on the market, they are the first to cater their product towards crypto users. With this new integration, we are finally seeing the narrative around what defines web3 crystallize. In our view, web3 is primarily about the “account-less internet.” Instead of signing up with an email/password and other personally-identifiable information (PII), users will sign up and log into services by signing cryptographic messages using their digital wallets. 1Password is smart to see this long-term trend materialize and they have quickly bolstered their product offering to cater towards this inevitable future of the internet by baking web3 functionality into the DNA of their core product.

Traditionally, the idea of storing sensitive private keys in a cloud-connected password manager, such as 1Password, has been considered risky by security experts. They contend that if 1Password were ever compromised (unlikely but theoretically possible), all of a user’s funds would be at risk along with their other sensitive credentials. However, there are shades of grey to deal with in this scenario as the world of cybersecurity is rarely so cut-and-dry. There is something to be said about the trade-off between convenience/usability and security in real-world practice. 1Password’s human-centric approach, which emphasis usability while minimizing any sacrifice of security, seems like a realistic middle-ground here. 
💨 Historic PunkIt! NFT Collection Withdrawn During Live Sotheby’s Auction 
A collection of 104 CryptoPunks, representing more than 1% of the entire NFT collection, was unexpectedly withdrawn from a live Sotheby’s auction on Wednesday night. The sale was reported to be the highest-valued estimate for an NFT or digital art collection ever offered at auction. The lot, titled “Punk It!”, was pulled by the seller 23 minutes after biddings were scheduled to start. Despite the turn of events, the hopeful bidders and crypto enthusiasts that had gathered for the live auction at Sotheby’s Upper East Side headquarters still enjoyed champagne and a live panel discussion about the history of NFTs which were originally planned to follow the close of the sale. 

The seller, under the pseudonym “0x650d”, originally bought all 104 CryptoPunks for $7 mn in ETH through a single on-chain transaction in July 2021. Since then, the collection has soared in value. When the lot was initially announced by Sotheby’s in early February, Punk It! was estimated to be worth between $20 and $30 mn. However, given recent market volatility, the CryptoPunks collection floor price is currently sitting at roughly 61.95 ETH or $158,815. As such, the entire collection – if we assume all 104 were the least expensive Punks and not rarer ones like an alien Punk - has declined in value to around $16.5 mn. The highest pre-bid offer for Punk It! according to multiple sources was $14 mn, which was also the reserve price for the entire collection.

0x650d tweeted that he was choosing instead to “hodl” the collection. Last-minute withdrawals of lots is not uncommon in the traditional art world, especially if there isn’t sufficient demand from buyers. However, the iconoclastic persona of 0x650d on Twitter making fun of the mainstream clientele of Sotheby’s for undervaluing the collection was controversial. Robert Leshner, who is the founder of Compound, a popular decentralized finance lending protocol, tweeted about the last-minute withdrawal of Punk It!, calling it “a sad day for digital art collectors.” Punk It! Is the second time Sotheby’s has initiated the sale of a major NFT collection. The first was a collection of 101 Bored Apes that was sold in September 2021 for $24.4 million. 
OUR TAKE: The weak pre-bid offers for the Punk It! collection and the rumored lack of buyers participating in the single-lot Sotheby’s auction were both likely contributing factors to 0x650d’s withdrawal. The highest pre-bid offer for the lot was not only significantly less than the estimated valuation by Sotheby’s (which was between $20 and $30 mn) but it was also lower than the floor price quoted for the entire collection from ongoing sales of CryptoPunk NFTs on marketplaces such as OpenSea. Given the sheer size of the PunkIt! Collection, the collection also likely included a handful of rare CryptoPunks, which individually can sell for well-above the quoted floor price. The five most recent sales of CryptoPunks on OpenSea range from 61.95 ETH to 75 ETH.
 
The expected undervaluation of the Punk It! collection through a Sotheby’s auction signals a lack of demand for riskier assets like NFTs from mainstream art buyers. Part of the low demand can be chalked up to overall market conditions. The market capitalization of all crypto assets has declined 23% year-to-date. The traditional equities market has also been down significantly YTD due to continued geopolitical tensions surrounding the conflict in Ukraine as well as ongoing uncertainty over rate hikes from the U.S. Federal Reserve. For the clientele of Sotheby’s, which is most likely more risk-averse than the retail users of OpenSea who are transacting exclusively in volatile crypto assets like ETH, these uncertain market conditions are dampening demand for risk assets.
 
Aside from market conditions, the higher valuation of the 104 CryptoPunks on marketplaces like OpenSea also suggests there remains a discrepancy in how NFTs are priced by buyers from a mainstream audience versus a more crypto-native audience. Unlike the clientele of Sotheby’s, users of OpenSea are interacting actively with the Ethereum blockchain and relying on tooling like Metamask to purchase their assets. The value of an NFT in context of its use across various decentralized applications on Ethereum, be it in a decentralized lending protocol or in a metaverse gaming environment like Decentraland, is greater than as a standalone purchase in fiat. As such, the continued adoption of the broader ecosystem of Web3 technologies is needed for valuations of NFTs to normalize between mainstream and crypto-native audiences. 
Other News
  • A highly-anticipated white paper outlining a new scaling upgrade to Bitcoin known as CoinPool has been released
  • Coinbase Wallet browser extension adds support for Ledger wallets
  • Intel unveils new details about its Bitcoin mining chip and rig
  • Ethereum layer-2 scaling solution zkSync launches a new public test network called zkEVM
  • Amber Group, a cryptocurrency trading firm, valued at $3bn after $200m Series B+ round
  • At ETHDenver, an annual Ethereum conference, developers start prototyping a layer-1 scaling solution for Ethereum known as "danksharding"
  • OpenSea faces a $1mn lawsuit over stolen Bored Ape NFTs
  • Block, formerly Square, reports nearly $2bn in bitcoin sales via Cash App during fourth quarter of 2021
  • Coinbase reports altcoins represented highest level of trading volumes in Q4 earnings
From the Desk
Access our research on the Bloomberg Terminal with ERH GXY <GO>
Stratum V2: The Future of Bitcoin Mining Protocols
In this report, VP of Galaxy Digital Mining Rachel Rybarcyzk explains how Bitcoin miners communicate with pools, provides an overview of the existing protocol (Stratum V1), and discusses the improvements offered by Stratum V2, as well as the paths to its adoption by Bitcoin network participants.

Crypto Giving Boomed in 2021
In this report, GDR's Christine Kim summarizes the cryptocurrency giving landscape and explains why people are donating in crypto more than ever before.

Charts of the Week
Following the King of Chess and Balloonsville "rug pulls," Solana-based NFT marketplace Magic Eden relaunches its white-glove minting service dubbed "Launchpad". This relaunch eschews hyper-growth in favor of fewer NFT launches with higher-quality projects, but has brought the platform’s trading volumes back in line with its competitors.
February 24th saw 172 unique borrowers liquidated across the most popular DeFi lending platforms on Ethereum, totaling over $12m in value.
‌
Letter from the Editor
The Letter from the Editor is a new section in our weekly research brief that will appear periodically and contain opinion about current events. The views expressed here are solely those of the author and do not necessarily reflect the views of Galaxy Digital.
Russia's Invasion of Ukraine, Dollarization, and Bitcoin as a Global Reserve Currency
Markets have been rocked by Russia’s invasion of Ukraine, with risk falling across the board. Russia formally recognized two breakaway regions in eastern Ukraine, then put military hardware there, and subsequently began cyber and kinetic operations against other parts of the country, apparently including both military and civilian infrastructure. Reports indicate that Russia is attempting to advance beyond the Donbass regions it recognized earlier this week and is waging war directly against Ukrainian forces. Air-raid sirens were heard early this morning in Kyiv, and some Western allies think Kyiv could fall to Russia in a matter of days or even hours.

Year to date, the S&P 500 is down 10%, the NASDAQ is down 14%, Bitcoin is down 17%, and Ether is down 28%. European markets were down 3-4% Thursday and Asian markets were off 2-3%. Gold, bonds, and energy traded higher. Commodities are likely to go higher both as a due to sanctions on Russia and supply chain disruptions resulting from the conflict. Some of Russia’s biggest exports include oil, refined oil products, natural gas, coal, platinum group metals, semi-finished iron, low-quality steel, nickel, timber, fertilizer, wheat, and other types of food oils. If commodity prices to continue to rise, that will impact CPI inflation as well.
Bitcoin as Digital Gold
 
Many have argued in recent weeks that BTC’s correlation to equities has dampened or even “put the nail in that coffin” for it as “digital gold,” or that the ability of Canadian authorities to “freeze the crypto wallets” of protestors shows it can’t be used as dissident tech. Just yesterday, a Bloomberg newsletter edition titled “The one about Bitcoin, Gold, and War” made both of these arguments, concluding that “all this goes to show that the maturation of Bitcoin isn’t as far along as some have hoped.” I strongly disagree with both of these takes, and the evidence is clear. (I’d be remiss if I didn’t mention that a different Bloomberg newsletter published a post in April 2021 titled “Bitcoin is displacing gold as an inflation hedge”).

For one, very few people thought bitcoin today was literally a digital version of gold. The comparison to gold has always been a heuristic, something to help you understand some of bitcoin’s key properties: it’s scarcity, fungibility, global nature, divisibility, etc. It’s not an exact comparison, especially today. Bitcoin is objectively a novel form of money that has some gold-like properties. We know that Bitcoin didn’t trade like gold in 2020 or 2021. But when the greatest money printing exercise in human history occurred, BTC soared. And when inflation began to rear its head, BTC soared. When it became clear that monetary tightening was on the horizon, BTC withdrew. Bitcoin is still volatile–still in an adoption phase.

One day, when everyone has decided whether or not to hold Bitcoin, and its ownership base has expanded significantly, its volatility will recede, and then it *may* trade like gold (even then it could trade like something else entirely—it truly is a novel creation). The way I think about the digital gold thesis (and there are other theses about Bitcoin), Bitcoin has the potential for dramatic upside because the trade is like an option on a future where it becomes digital gold. But today, Bitcoin trades like a risk asset—that’s more because of those who trade it than because of its inherent properties: BTC is now widely held by traditional investors, and many of them classify it as a risk asset, precisely because of its potential rather than its reality today, and so they trade it like a risk asset. 

Bitcoin as Dissident Tech

In many ways, Bitcoin is and has always been dissident tech. Whether as an inflation hedge or vote against modern monetary policies, or to fundraise for dissident activities, Bitcoin has been repeatedly used to protest authority, particularly as a way to protect and build or transfer wealth under oppressive circumstances. The idea that Canada froze Bitcoin wallets is a mischaracterization: it ordered Bitcoin custodians to freeze sanctioned coins, which governments can order from any regulated financial intermediaries regardless of the asset type. That this was possible does not signal that Bitcoin is ineffective as dissident tech.

We wrote in our Crypto Giving report last week about the use of Bitcoin to fund demonstrations by both the “Freedom Convoy” of truckers in Canada and the EndSARS protests against police brutality in Nigeria. Other political dissidents and protest movements that have fundraised using Bitcoin, particularly when conventional fiat banking rails have been blocked or compromised, include but are not limited to:

  • Russian dissident Alexie Navelny, who received more than $300k in BTC donations in 2021;
  • Wikileaks has accepted Bitcoin donations since 2011 after the US government, credit card companies, and banks cutoff the whistleblower organization following disclosures of leaked information (on which Satoshi directly commented in 2010);
  • Venezuelans, Argentinians, Lebanese, and Turks seeking safe-haven from extreme inflation and ensuing currency controls have relied on Bitcoin and public blockchains both to store wealth and conduct remittance payments;
  • and activists are using stablecoins to fund the opposition government in Myanmar, which has formally adopted Tether its reserve currency.

Bitcoin has been used around the world as dissident tech because of the cryptocurrency's credible neutrality and censorship-resistance.

Russia and Dollarization

This all brings me back to Russia. The United States and its allies, which control a large portion of the world’s monetary, financial, and payments systems, increasingly use targeted or broad financial sanctions as a foreign policy tool. This can be an effective way to thwart the financing of illicit activities like terrorism, smuggling, or drug dealing. Adding these compliance burdens on the use of the dollar may force criminals into more complex financial arrangements that make their operations more difficult or outright impossible. But these burdens also make it harder for everyone else to use the dollar. Ever since the United States and its allies imposed sanctions on Russia in 2014 following the annexation of Crimea, Russia has made dedollarization a priority. Russia has made several key moves to reduce its reliance on the dollar and sanction-proof its economy:

  • Russia and China have made de-dollarizing their bilateral trade a priority. The two nations have signed several long-term energy deals, some of which will settle in Euros rather than dollars.
  • Russia has significantly increased its foreign currency reserves, which now stand at $631bn, the 4th largest in the world. Only 16% of those funds are in dollars today, half of the portion comprised of dollars in 2013. Russia also has the 5th largest gold reserve in the world at nearly 2300 metric tons. China, Russia’s ally, has the largest forex reserves on earth at more than $3.2tn. And, while the composition is classified, China officials in 2019 reported that in 2014 its dollar assets were 58% of its total reserves, down significantly from 2005 when it was 79%.
  • 80% of Russia’s exports in 2013 were denominated in dollars, while just about half of its trade settles in dollars today. 

President Biden announced “profound sanctions” in response to Russia’s invasion of Ukraine, but not only was Moscow aware those sanctions would come and they invaded anyway, but they’ve been preparing for this eventuality for years. If de-platforming a country doesn’t deter that country, is your platform as powerful as you think? Given the measures that Russia has taken over the years to insulate itself from the dollar, it's more important than ever that the United States works with other platforms as well, including China, to apply pressure to Russia.
Several possibilities for the future of money are coming into view, but one where the dollar is universal is slipping away. A future where the world bifurcates or splits between the dollar and one or several other currencies looks very likely and you could argue it’s already here. These alternative currencies, like China’s yuan, don’t come with as many compliance burdens as the dollar, which perhaps makes it attractive to some as a new reserve asset. The use of the dollar system for political purposes, whether justified or not, makes the dollar less widely used. And sanctions as a tool in general have at best a mixed record of success in changing the targets’ behaviors.

If Russia the nation state was to meaningfully adopt or use Bitcoin as dissident tech, it would be viewed negatively by the United States and its allies, but the world is large and the vote of confidence in Bitcoin’s security, decentralization, and credible neutrality offered by adoption on such a scale would be a boon for BTC in the long run. Bitcoin could be a credibly neutral global monetary system that wouldn’t be beholden to the various competitions and machinations of the world’s superpowers.

The world wouldn’t need to wonder whether each global conflict would result in the overturning of the global monetary order. Nation states could still mark addresses, as the Canadians did this month, as sanctioned and force regulated intermediaries under their jurisdiction to freeze those assets if they appear within reach. Indeed, OFAC has already placed some specific bitcoin addresses on the SDN list of sanctioned entities, and they could undoubtedly do the same if Russia were to adopt or use bitcoin to evade sanctions placed on its fiat activities. That would make some coins unusable in some markets, but no one could force some person, or nation, off the network itself.

Whether or not the global use of a neutral monetary system like Bitcoin would be favorable is mostly in the eye of the beholder. Certainly, American officials and policymakers would prefer the dollar to remain the global reserve currency, because it’s under their control. Russia and China do not prefer the dollar as the global reserve currency—they would prefer the ruble or the yuan because they are under their control, which Americans wouldn’t want. The reality is that, since 1450, no fiat currency has remained the global reserve currency for more than 110 years, and the dollar has been the global reserve since 1944. It isn’t likely to be the global reserve currency forever—that’s just history.
Russia’s invasion of Ukraine doesn’t mean the world will move to a Bitcoin standard by any means, but it does highlight the ineffectiveness of sanctions at deterring Russia’s behavior. That reality speaks volumes about the state of the international monetary order, and the dollar’s role in it, and accelerates the urgency of the reserve currency question.

I think it’s fair to wonder whether humanity is destined to oscillate from one superpower-controlled reserve currency to another forever, or whether we reach a stage as a species where we can agree on one, neutral platform. Gold was once that platform, but its usefulness is woefully inadequate in an increasingly digital world, and one that’s only going to become more digital. Bitcoin could fill that void, and it’s reasonable to wonder if it will. This is yet another view of the digital gold thesis.

Realism and History

President Biden said yesterday that the “next few weeks and months will be hard on the people of Ukraine,” and that is both true and distressing. I’m a die-hard supporter of liberty, and that includes the right of peoples everywhere to self-determination. No one wants to live under the yoke of a foreign power, nor should they be forced to do so at the threat of military invasion and occupation. I’m also a realist when it comes to foreign policy, and I want to give a little context on how I think about Russia’s interest in Ukraine, as I’ve been following this for more than 10 years.

Having been invaded several times in its history from the West, Russia has maintained a strategy of collecting buffer states on along its periphery. The Warsaw Pact was one incarnation of this, which itself was a reaction to the integration of West Germany into NATO in 1955. In more recent times, Moscow has worked to ensure the states along its western periphery—notably Belarus and Ukraine—remain firmly allegiant to Russia. Belarus has long been a close ally of Russia, and prior to 2014, Ukraine was close to Moscow as well.

The 2013 Euromaidan demonstrations in Ukraine resulted in the impeachment of Russian-allied president Viktor Yanukovych, who fled the country after protestors gained control of the presidency in 2014. In response, Russia seized Crimea and sent “little green men” into the Donbass, the eastern part of the country, specifically Luhansk and Donetsk, essentially taking power without deploying uniformed military. It’s those two regions—Luhansk and Donetsk—that Russia formally recognized this week as independent and into which it sent military hardware.

I generally view international relations through a realist lens, particularly a state-centric view in which states are the primary actors and they tend to act in their self-interest, with power and security being the primary concern of all states. If you consider Russia’s geopolitical situation, and understand the vulnerability of their Western periphery, Putin’s actions aren’t as confounding. Russia doesn’t have the benefit of being bordered by two oceans on East and West and two non-threatening states North and South. It must pursue a strategy of building alliances or vassal states along its Western periphery to guard against incursion. And until 2014, it had most of its western buffer intact with both Minsk and Kyiv controlled by allies.

Russia viewed the Euromaidan protests as being backed by NATO countries and the resulting deposition of Yanukovych as a major win for its geopolitical rivals. And with NATO countries subsequently agitating to bring Ukraine formally into the alliance, which was created primarily to counter Russian power and influence, Russia faced the prospect of formally losing a buffer state with which it shares 1500 miles of its western border.
Adding Ukraine to NATO, whether or not it was or is likely to happen, would represent a significant eastern expansion of the military alliance.

Thomas Friedman recounted this week that, immediately following the US Senate’s ratification of NATO expansion in 1998, George Kennan (best known as a primary architect of the Cold War strategy of Soviet containment) was shocked at the concept of further NATO expansion:
"I think it is the beginning of a new cold war. I think the Russians will gradually react quite adversely and it will affect their policies. I think it is a tragic mistake. There was no reason for this whatsoever. No one was threatening anybody else. This expansion would make the founding fathers of this country turn over in their graves.

“We have signed up to protect a whole series of countries, even though we have neither the resources nor the intention to do so in any serious way. [NATO expansion] was simply a lighthearted action by a Senate that has no real interest in foreign affairs. What bothers me is how superficial and ill informed the whole Senate debate was. I was particularly bothered by the references to Russia as a country dying to attack Western Europe.

“Don’t people understand? Our differences in the Cold War were with the Soviet Communist regime. And now we are turning our backs on the very people who mounted the greatest bloodless revolution in history to remove that Soviet regime. And Russia’s democracy is as far advanced, if not farther, as any of these countries we’ve just signed up to defend from Russia. Of course there is going to be a bad reaction from Russia, and then [the NATO expanders] will say that we always told you that is how the Russians are — but this is just wrong.”
Imagine if Russia admitted Mexico into a military alliance specifically designed to counter the United States. The US would do everything in its power to protect its periphery. The point here is not to justify Russia’s actions, but to understand them. Russia’s actions in Ukraine are not because of a supposed “genocide” inflicted upon civilians by the Ukrainian military in Luhansk and Donetsk, as Moscow claimed. States act in their interest, and Moscow believes control over Ukraine is existential for Russia’s security.

Conclusion

No one should have to live with the threat of invasion or under the yoke of a foreign power. More than almost anything, I believe in liberty, and there's nothing I want more than for peace to reign in Ukraine and for the Ukrainian people to be safe and free. The crypto community is trying to help here: The Giving Block provides a list of major international charities and non-profits that are assisting Ukraine and that accept cryptocurrency donations.

The dispute over Ukraine is not new. I remember the events of 2013 and 2014 well—it was the efforts by some Euromaidan protestors to fund their demonstrations with bitcoin donations that really got me interested in Bitcoin in the first place, which I've spoken about publicly several times.
Then, like today, Bitcoin was used as dissident tech. It is being used again today to fundraise to defend and help Ukrainians, but it could be used by a nation state as well for the same reasons. It’s not just digital gold, indeed it’s much more. And crypto markets have matured to the point where they trade alongside other macro asset classes, and that makes them susceptible to global events.

Following its correlation to equities or gold, or considering it a venture bet on the future of money, are different investment theses people apply to Bitcoin. But it’s also its own credibly neutral monetary network, and Russia and China’s efforts at dedollarization, which are highlighted by Russia’s actions in Ukraine and West’s response, beg the question of bitcoin’s future in a world that may one day transition to a new reserve currency.

There’s a lot we don’t know about how this story will unfold. But in addition to many other questions about the situation in Ukraine, observers should be wondering what it means for the future of money and what the role of the dollar or bitcoin will be in that future. If it’s inevitable that your currency eventually loses its global reserve status, wouldn’t you prefer its replacement be a credibly neutral standard rather than one controlled by an adversary?

Alex Thorn
Head of Firmwide Research, Galaxy Digital
Thank you!
Thanks for reading this week. Have a great weekend.

Please feel free to contact us at research@galaxydigital.io with any questions or comments.
Alex Thorn
Head of Firmwide Research
If this email was forwarded to you and you would like to sign up to receive it regularly, click here.
Legal Disclosure:
This document provides links to other websites that we think might be of interest to you. Please note that when you click on one of these links, you may be moving to a provider's website that is not associated with Galaxy Digital. These linked sites and their providers are not controlled by us, and we are not responsible for the contents or the proper operation of any linked site. The inclusion of any link does not imply our endorsement or our adoption of the statements therein. We encourage you to read the terms of use and privacy statements of these linked sites as their policies may differ from ours. This document, and the information contained herein, has been provided to you by Galaxy Digital Holdings LP and its affiliates (“Galaxy Digital”) solely for informational purposes. This document may not be reproduced or redistributed in whole or in part, in any format, without the express written approval of Galaxy Digital. Neither the information, nor any opinion contained in this document, constitutes an offer to buy or sell, or a solicitation of an offer to buy or sell, any advisory services, securities, futures, options or other financial instruments or to participate in any advisory services or trading strategy. Nothing contained in this document constitutes investment, legal or tax advice. You should make your own investigations and evaluations of the information herein. Any decisions based on information contained in this document are the sole responsibility of the reader. Certain statements in this document reflect Galaxy Digital’s views, estimates, opinions or predictions (which may be based on proprietary models and assumptions, including, in particular, Galaxy Digital’s views on the current and future market for certain digital assets), and there is no guarantee that these views, estimates, opinions or predictions are currently accurate or that they will be ultimately realized. To the extent these assumptions or models are not correct or circumstances change, the actual performance may vary substantially from, and be less than, the estimates included herein. None of Galaxy Digital nor any of its affiliates, shareholders, partners, members, directors, officers, management, employees or representatives makes any representation or warranty, express or implied, as to the accuracy or completeness of any of the information or any other information (whether communicated in written or oral form) transmitted or made available to you. Each of the aforementioned parties expressly disclaims any and all liability relating to or resulting from the use of this information. Certain information contained herein (including financial information) has been obtained from published and non-published sources. Such information has not been independently verified by Galaxy Digital and, Galaxy Digital, does not assume responsibility for the accuracy of such information. Affiliates of Galaxy Digital own investments in some of the digital assets and protocols discussed in this document. Except where otherwise indicated, the information in this document is based on matters as they exist as of the date of preparation and not as of any future date, and will not be updated or otherwise revised to reflect information that subsequently becomes available, or circumstances existing or changes occurring after the date hereof. The foregoing does not constitute a "research report" as defined by FINRA Rule 2241 or a "debt research report" as defined by FINRA Rule 2242 and was not prepared by Galaxy Digital Partners LLC. For all inquiries, please email contact@galaxydigital.io. ©Copyright Galaxy Digital Holdings LP 2021. All rights reserved.