Key Insights
- Crypto market sentiment remains low and could go lower as geopolitical tensions escalate.
- Iran reportedly shuts down the Strait of Hormuz, blocking one of the most critical oil arteries in the world.
- Here’s how the impact could ripple across the investment landscape.
Macro factors have been holding the crypto market in a chokehold over the last few months. As a result, analysts have been keeping a keen eye on global macro conditions to gauge how the winds of geopolitics and global trade will influence market sentiment.
Speaking of sentiment, the crypto market retreated from 12 points on the fear and greed index on Monday to 10 points just a day later. This subdued sentiment mirrored the surge in geopolitical tensions in the Middle East.
You may be wondering what this has to do with the crypto market. Over the last few years, it has become clear that macro factors strongly influence risk-on assets such as crypto.
So, when unfavorable geopolitical events occur, they may trigger liquidity outflows from cryptocurrencies. Now imagine what happens when the same events also spread into economic contagion.
Iran reportedly shut down the Strait of Hormuz. Here’s what it means for the crypto market
Tuesday morning reports said Iran had shut down part of the Strait of Hormuz. This comes amid elevated tensions between Iran and the US.
Roughly 31% of all the crude oil transported across the oceans passes through the Strait of Hormuz, according to CNBC. This makes it a critical control point, or choke point, whose disruption has ripple effects felt across the globe.
That usually manifests as higher oil prices, which in turn raise energy costs. This includes the cost of mining Bitcoin, which may force some miners to shut down.
In extreme cases, higher energy costs may force miners to sell some of their crypto holdings to cover their running costs. Aside from influencing investment decisions and liquidity flows, this is the second way that macro factors suppress the crypto markets.
The Strait of Hormuz thus plays a critical role in the current tensions between Iran and the US. It is worth noting that the temporary shutdown was part of a drill. However, it seems that Iran was preparing for a potential eventuality.
Here’s what we know so far
The latest updates revealed that Iran and the US were meeting in Geneva, Switzerland, for talks. The outcome of those talks will determine how things will unfold in the global arena.
A negotiation breakdown may signal a deeper push that could set the pace for heightened conflict. This is one of the potential eventualities that could cause actual disruption at the Strait of Hormuz.
This is why analysts are keen on the outcome of talks between Iran and the US. The market may view de-escalation as a positive sign. This might be one of the outcomes that may nudge the market sentiment towards recovery.
Meanwhile, investors have also been sitting on the sidelines this week because of upcoming market data. The US Federal Reserve was scheduled to hold a mid-week meeting to release durable goods data. PCE data is also slated for release on Friday.
Traders might be waiting for the data to establish a clear directional bias. The combination of these factors might explain why the crypto market volumes have been low this week.