Iran has recently made a move against the US in a way that has caught almost everyone off-guard - demanding that re-opening the Straight of Hormuz (which controls 20% of the world's oil supply) be done through the Chinese Yuan, rather than the dollar. While the US has the upper-hand against them militarily, they are striking America's biggest weakness right now - its economy. The value of the dollar itself has already been dropping 10% year-over-year and this may accelerate its decline even further, if trends are not reversed.
I won't be talking about too much about geopolitics or military strategy in this post (it is outside my realm of expertise at this point) but mostly on the potential impact it might have on crypto/blockchain projects - particularly in Bitcoin. The idea that BTC would act as a "safe-haven" during times of financial disruption and duress doesn't seem to be panning out the way maxis thought it would - but that should come as no surprise at this point because in recent years the currency has become intertwined with the status-quo in a way that makes it vulnerable to the same kinds of risks and pitfalls.
The Dollar is (was?) the World's Global Reserve, Bitcoin is (was?) Crypto's Global Reserve
To understand how prices have been valued over crypto's relatively short existence, one has to look at how liquidity and capital in-and-out-flows have been handled historically over time. Since its inception, there have been roughly 4 different phases in how cryptocurrencies functioned as "currencies":
- (2009-2013) - [The Bartering Era] - Bitcoin
- (2013-2017) - [The Smart Contract Era] - Ethereum, Dogecoin, Litecoin, Ripple, Monero, Dogecoin, Gridcoin
- (2017-2020) - [The ICO Era] - Tezos, EOS, Cardano, Tether, ETH L2s
- (2020-2022) - [NFTs and Memecoins Era] - Too Many to Mention
- (2022-*) - ?
Roughly speaking. The industry is currently redefining itself but there hasn't been a clear trend that could be labeled as a re-emergence so it's largely an undecided race at this point. But to fully understand what had happened during these eras (and perhaps get an idea where things may go), one also has to understand where the liquidity itself was coming from:
- Pure Bartering - When Bitcoin was first launched, the only way to acquire the currency was to mine it yourself, or barter for it with real-world goods (like a pizza) as a trade.
- Bitcoin as the "Reserve Currency" - New crypto projects started to emerge as new contenders, but the only way to "get in" at the time was through BTC and BTC pairings. To get into Ethereum's ICO, for example, you had to "find" some Bitcoin "somewhere" and pay for it that way. Fiat onramps and exchanges did not exist until much later.
- ICO and Fiat Onramps - By 2017, there were several exchanges available for public use, but given the collapse of Mt.Gox in 2015, it was still seen as a risky move and most people stayed away from it entirely. For those willing to take a bet, however, there were finally ways to convert your dollars into crypto. (The folks that got into the industry at phases 1 or 2 but "padded" their invesment during phase 3 probably got the best returns, objectively speaking.)
- NFTs and Memecoins - By 2020, exchanges and fiat onramps have become regulated and seen as "stable" enough for mainstream usage, which fueled the "craze" behind NFTs and memecoins of its time. Memecoins are basically a scaled up version of the ICO that was seen as the business model that the industry could iterate on as its "product-market-fit". The liquidity from these endeavors created an unexpected demand for art - NFTs - as a product of its success.
- The Collapse - By 2022, the hype behind NFTs and memecoins started to wane, and has yet to recover from its all-time-highs. The demand for memecoins have exhausted the market due to overexposure and oversaturation, and is largely an industry that is cannibalizing itself of what's left of it. The demand for NFTs has also dropped, as a result of crypto markets going down as a whole.
^On a personal note, the reason why I've decided to focus on NFTs rather than DeFi (which is how I made my money in previous eras) is because I believe there are innovations and developments still left to be done, whereas there really isn't much left to do in the financial sectors of crypto. Most of the important stuff has already been figured out in previous cycles and is largely "complete". (Good for stability, bad for growth.)
So if the "Web3" industry is serious about working on things coming to the next cycle, they would have to focus on products and applications that provide real-world value, rather than pure speculative growth. The mentality of "getting rich" in this space has to switch from HODLing (and basically doing nothing, honestly) into how does one accrue more of the coin by providing a service - an exchange of money for value - a real business, in other words. Coins and projects that don't fit under this criteria is not likely to survive until the next cycle and we're starting to see examples of these happening already.
What does any of this have to do with Iran or the Straight of Hormuz, however? Given that the majority of people in crypto right now came in post-2020, they often underestimate the impact that Phase 2 (Bitcoin as the "reserve currency") still has on the crypto markets as a whole. Many of the founders and leaders in the industry came to power in the era where Bitcoin was considered "king" because the only way to buy any other coin was to go through BTC pairings - not unlike how the dollar currently functions in the world as a whole.
And this practice still continues to this day. Some coins (like Gridcoin) can still only be bought through BTC pairings, even though it's a legitimate project that has been around for a very long time - and the other evidence of the pairings still mattering is the way the price of crypto often moves up and down in parallel like the rising and receding tides of the ocean. Even though there's no technical reason why this should be the case, old habits die hard and the "old guard" of the crypto industry is still largely in charge, at least for now.
But give a few years, it's likely that all of that will change. The reason why the recovery hasn't progressed as fast as a lot of people would like, is largely because the bigger coins like Bitcoin and Ethereum (which tried to create its own ETH-pairings) has started to exhibit rent-seeking behaviors, which the dollar itself has colluded into as well. Given that there's so much fiat and traditional contracts mixed into these ecosystems at this point, if the USD collapses underneath it, there is no telling what it will do its price.
Bitcoin and the dollar are not only intertwined economically, but culturally as well - the mentality behind the two are nearly identical, as are the players who are currently involved as well. The primary goal is to remain on the throne as "king", not to innovate or spur growth - if you're already on "top", the only direction you can go is down, after all. One is doing it through scarcity economics, the other, inflation - but they're two sides of the same coin, quite literally at this point.
So the people and organizations that looked into these issues in detail - they have (correctly, imo) decided that the risk-exposure wasn't all that different from holding cash anyway (not to mention the hacks that happen on EVM systems and bridges regularly), and that sentiment is clearly reflected in the markets over the last year where world-changing events don't seem to make the price budge, even though if you bought into the "hedge" idea, you'd think it would.
So as the dominance of the US dollar continues to become a serious question people start asking themselves, we'll also start to see some cracks emerge in the narrative of the "Web3" space as a whole - the ideal outcome being that the liquidity from these bigger projects start flowing into smaller, more agile ecosystems, coins, and projects that have the ability to stay more nimble and adapt to today's rapidly changing environment in the long run.
And it will all start from the Straight of Hormuz, in the year of 2026. 🏞️