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The Costs of War
Back in December, I said that Q1 of 2022 would make the entirety of 2021 look like a dress rehearsal. This last week was not what I was expecting, with Russian forces now engaging in a full-on invasion of Ukraine. As I’ve researched the conflict in preparation for today’s newsletter, I got a much stronger sense of how complex the situation actually is. The heart of the war in Ukraine is rooted in the history of NATO itself, which was originally created post-WWII as a military alliance between the US and western Europe. The goal was to provide “collective security against the Soviet Union.” Since the turn of the century, NATO has slowly inched its way eastwards towards Russia, collecting members such as Lithuania, Latvia, and Estonia. If Ukraine had managed to join, NATO members would have nearly surrounded Russia all along its western border. The northernmost country bordering Russia is Finland, and they’ve coincidentally been angling for NATO membership a lot more this year. Meanwhile, the country directly north of Ukraine is Belarus, which is in a security treaty with Moscow.
So Ukraine is a key player in more ways than one in this global chess game. Because of its location, it’s long been a pipeline for oil produced by Russia and sold across Europe. It’s the largest European country by land area, and is the leading wheat producer in the world. But with Putin knocking its door down, it now finds itself standing alone. Neither NATO nor the US have offered military support, even though the US has about 90,000 troops stationed across Europe, a number which they’ve been bolstering actively. NATO itself has 40,000 troops at the ready, but so far the official position is that they are ONLY there to defend the borders of NATO member countries. Meanwhile, the capital city of Kyiv is literally handing out AK-47s to its civilians to protect their families from the encroaching Russian army.
The total number of troops deployed by the US in Europe is actually quite similar to the peak of their recently concluded Afghan campaign. This provides us some small insight into the financial cost of a full-on war in Europe … at least from the US perspective. Between 2010 to 2012, the US had more than 100,000 troops deployed in Afghanistan, and their annual costs exceeded $100B a year. The total price tag of the US presence in Afghanistan is now estimated at $2T, a figure which exceeds the combined market cap of the entire cryptocurrency industry.
This brings me to two points that I wanted to discuss in this week’s newsletter. The first is that I think that the popular narrative that Bitcoin is a “safe haven” asset is currently incorrect. If you don’t know what a “safe haven” is, that’s the term for assets that markets value most during times of uncertainty. Usually, that meant gold, and indeed, the yellow metal has outperformed Bitcoin this year. Does that mean that Bitcoin will never be a safe haven? No, but we should acknowledge that the institutional investors who made a lot of noise about BTC in 2020 are the exact same investors who are now pulling out of the crypto markets and reverting to cash. Bitcoin has a long way to go in order to be a true safe haven asset, with its $745M marketcap being just 5% of gold’s $12T. (Also check out FTX CEO Sam Bankman-Fried’s take on the developing market here.)
The second point I wanted to make is going to be extremely contentious, so I’m going to need everyone to keep their minds open for this one. Every hundred years or so, the world’s dominant currency changes. Right now, the dominant currency is the US Dollar. Prior to WWII, it was the Pound Sterling. In the 18th century, it was the Dutch Guilder. Generally, the dominant currency belongs to the country with the most advanced military complex, and for 500 years that meant having the biggest naval presence. Of course, these days modern warfare is much more complicated, with drones, cyber attacks, ransomware, and economic sanctions all being viable weapons.
All that being said, I’m wondering if we’re in for a change soon. When I look at the stirring army recruitment ads produced by the Chinese and Russian military, and compare that with their “woke” US counterpart, I start to think that perhaps we’re seeing the dollar on its last legs. (Thanks, Celeste, for pointing out this video to me recently.)
Crypto prices have bounced back by 5% or more in the last 24 hours, possibly as investors acknowledge that the market was somewhat oversold this past week. Stocks have also risen, and at least some writers are attributing this to the possibility of Russia-Ukraine talks. I’m mildly optimistic that the Ukrainian conflict will find a swift resolution, as it doesn’t look like there are any players other than Putin with a stomach for a full-scale armed conflict. That said, if Russia uses cryptocurrencies to evade their economic sanctions, that may trigger aggressive regulatory clampdown from the US and EU … neither of which have been particularly friendly to public cryptocurrencies in recent months.
Have a great weekend, cryptofam, and stay safe out there!