The recently ignited Israel-Hamas war is a tragedy beyond description. As both sides and the world search for a palatable resolution, the conflict has also borne immense repercussions on various markets and industries beyond the Middle East. At first glance, the most obvious impacts can be found in international trade and oil markets, with oil prices rising sharply since the conflict’s inception. Yet another interesting case study would be the conflict’s effect on the world of cryptocurrencies. Crypto has historically been a volatile market just by itself, yet blockchain technology can theoretically be argued to act as a hedge against geopolitical instability. Further complicating the matter is how cryptocurrencies like Bitcoin can be used as a tool in war, for fundraising or store of value purposes. So just how connected is cryptocurrencies to the Israel-Hamas conflict? To answer that question, we can take a look at recent history.
Recent History: Crypto’s Role in Russian-Ukrainian War
Lessons can be gleaned from the Russian-Ukrainian War that erupted about 1.5 years ago in early 2022. It was likely the first major war in which cryptocurrencies played a strong role, both at a state level as well as for individual civilians.
The first use case for cryptocurrencies came in the form of donations. As of October 2023, over $70 million in cryptocurrencies has been donated to the Ukrainian government and other organizations supporting the war effort. These donations have been essential in helping Ukraine to defend itself against Russian aggression. Cryptocurrency donations have also been used to provide humanitarian aid to Ukrainians affected by the war. For example, the nonprofit organization UNICEF has used cryptocurrency donations to purchase medical supplies and other essential items for Ukrainian children and families. On the other hand, pro-Russian groups have also sought crypto donations. Chainalysis found that as early as 5 months into the war, 54 volunteer groups began using crypto as an avenue to crowdfund information campaigns and military equipment for the Russian military.
In a similar vein, pro-Russian groups have used cryptocurrencies to evade sanctions placed upon the country and its ruling class. While on-chain data shows that most crypto markets are too illiquid to facilitate a mass wealth transition on the part of Russian oligarchs, it’s still possible that such activity is happening on a smaller scale. Interestingly, since the war began, Ukrainian activity on centralized exchanges have grown while Russian activity dipped significantly. The civilian population in Ukraine may consider cryptocurrencies, especially Bitcoin and Ethereum, as reliable storage of value.
Lastly, the anonymity and technology sophistication that the blockchain opens up has led to a surge in ransomware attacks. Following the adoption of more work-from-home structures, ransomware attacks resulting in cryptocurrency theft have been on the rise. Many of the most prominent ransomware and DDOS hacking groups, such as Conti and KillNet, were later found to be operating to raise funds for the Russian war effort.
Crypto Fundraising for War
Much of the Russian and Ukrainian playbook when it comes to cryptocurrencies can likely also be utilized by both sides of the Israel-Hamas conflict. The most straight-forward and prevalent of which would be to simply use the crypto as its primary use case - as a reliable storage of value to fund military operations.
Since earlier this year up to the outbreak of hostilities in October 2023, Israel announced that it has frozen crypto accounts associated with groups like Hamas, the Palestinian Islamic Jihad (PIJ), and Hezbollah. According to a Wall Street Journal report, blockchain analytic organizations have found that wallets linked to these groups have amassed over $135 million worth of cryptocurrencies. While this could be seen as a negative use case of crypto being used to fund war, it’s also interesting to note that the mere fact these wallets could be traced and flagged represents development in tracing technology. Perhaps cryptocurrency fundraising is not as effective or easy to hide as it once was.
This trend is further supported when Hamas announced that it would no longer accept crypto donations. Recent data also shows that the number of crypto transactions from PIJ has dropped significantly. This comes after reports that the groups suffered significant loss of funds after many wallets linked to them were frozen. Ironically, it seems that blockchain fundraising methods, which are traditionally thought to be more opaque, are easier to trace and shut down compared to the state funding that Hamas may have received from countries like Iran.
Crypto as Hedge Against Conflict
While crypto has long been criticized for being a medium of exchange used to facilitate illegitimate arm deals, its decentralized foundations also allow it to be used by ordinary people to transfer their wealth. After all, there is a reason why Bitcoin is sometimes nicknamed “digital gold.”
Kumar Gaurav, CEO of Cashaa, a blockchain-based financial products platform, states that “It’s important to note that cryptocurrencies have demonstrated resilience amidst geopolitical turmoil in the past. Their decentralized nature and appeal as a hedge against traditional financial systems make them an attractive asset class during uncertain times.”
This argument harkens back to the debate about how much the cryptocurrency market has decoupled from traditional ones. In the last bull run, major tokens often mirrored the price movements of big technology stocks, which was a puzzling sign to some crypto experts. Because cryptocurrencies offer an alternative to the traditional system of government oversight and centralize banking, it would make sense for digital assets to rise in value when signs of uncertainty arise in the traditional system.
More Regulation Coming?
One potential narrative that hasn’t stirred much attention yet is that of increased regulation as a result of geopolitical turmoil. During times of war, government power usually expands and tightens, leading to alternative vehicles such as cryptocurrency to be more heavily constrained.
For example, Russia was slapped with sanctions upon the outbreak of its war with Ukraine last year, and sanctioning countries like the USA sought to reduce the potential of loopholes involving crypto money laundering. Likewise, despite many wallets linked to the Israel-Hamas conflict being frozen, it’s possible that both sides will proceed to impose even more restrictive measures on the other’s use of crypto fundraising.
Crypto mining can also be adversely affected in the medium to long-term, as Israel is a big player in the BTC mining sector. The war may disrupt mining activity, leading to a short-term spike in Bitcoin hash rate.
Crypto Market Impact from War
While the Israel-Hamas conflict has created immense unease in the oil markets and may even have widespread ramifications on long-term open international trading, the crypto markets have held steady so far.
What’s unique about crypto is that since they live natively on the blockchain, they aren’t as reliant on any specific country, region or supplier as other commodities would be. Cryptocurrencies exchange hands globally wherever there is an internet connection, and the markets never close. This is why top trading platforms like Phemex implement contract trading with funding fees to peg the contract price to asset spot price.
In the few weeks since the Israel-Hamas conflict broke out, Bitcoin price has remained quite resilient and unaffected. Crypto saw a 2% dip overall upon the initial news outbreak, but this was relatively minor compared to other markets. However, the crypto futures market saw a different story as $100 million in liquidations were racked up on long contracts, as the market began a selloff. Other than this initial drop, crypto assets have maintained steady since. Such a phenomenon mirrors what happened last year when the Russian-Ukrainian conflict started - Bitcoin fell as much as 7% in a single day but the overall market had largely rebounded and stabilized by March 2022.
In fact, the major volatility experience over the past week has had nothing to do with Israel-Hamas, but with a false alarm report that the Blackrock Spot ETF for Bitcoin had been approved, which momentarily sent BTC price surging by over 10%. While cryptocurrency price levels were temporarily rattled by the immediate news of war, it seems like the space is still influenced more highly by native narratives such as Bitcoin halving and ETF progress.