Middle East explodes, Bitcoin steady: is something broken?

Why do markets remain calm while the Middle East is on fire? Is Bitcoin really immune to geopolitical chaos, or are we missing something bigger here?

Rockets fly, Bitcoin stands still

One year ago, Israeli Prime Minister Benjamin Netanyahu stood confidently in the United Nations General Assembly, celebrating what seemed like growing peace in the Middle East. However, today, the landscape looks radically different.

The ongoing war in Gaza is approaching its first year, but the conflict has spread far beyond the region. With Iran now involved, tensions between Israel and Hezbollah have escalated sharply, raising fears of a broader regional war.

A major turning point came on September 27, when Hezbollah leader Hassan Nasrallah was killed in an Israeli air strike. Nasrallah suffocated after being trapped in his secret hideout, which was bombed by 80 tons of bunker-buster bombs.

The same strike also killed Iranian Revolutionary Guard Commander Abbas Nilforoushan in Beirut, dealing a strong blow to Iranian-backed militias in the region.

These deaths dramatically increased tensions, prompting Iran to retaliate a few days later. On October 1, Iran Fired Widespread rocket attack on Israel, approximately 180 rockets were fired – a more intense escalation than the rocket barrage that occurred in April.

While Israeli defenses intercepted many missiles, some of them found their targets, hitting military bases, restaurants, and schools. The Iranian Islamic Revolutionary Guard Corps announced that the success rate of its strikes reached 90%, which included the use of hypersonic missiles.

In the midst of these escalating hostilities, one might expect markets to react as they have in the past. However, the latest dynamics tell a different story.

The assassination of Hamas leader Ismail Haniyeh in July sent shockwaves through both traditional markets and the cryptocurrency space, with Bitcoin (BTC) falling in response.

However, despite heightened tension after Nasrallah’s death and Iranian missile attacks, cryptocurrency markets – especially Bitcoin – have defied the usual pattern of panic selling during the conflict.

So why did markets react so sharply in April and August, but appear resilient in the face of this latest escalation? Let’s dive deeper into what’s changed and what this might mean moving forward.

From the August sell-off to the September rally

On July 31, the political landscape in the Middle East witnessed a radical shift when Haniyeh, a prominent Hamas leader, was assassinated in Tehran.

Haniyeh has been a key figure in Hamas since its early days in 1987. He even served as Prime Minister of the Palestinian Authority and was the highest-ranking Hamas leader to be killed since the war between Israel and Hamas began. His killing dealt a heavy blow to the Palestinian armed group and led to escalating tensions across the region.

As the news arrived, the markets’ reaction was immediate. Bitcoin, which was worth around $66,500, experienced a sharp decline, losing nearly 10% of its value in just a few days. By August 4, it had fallen to $60,500.

Global stock markets did not fare much better. Between July 31 and August 4, the Nasdaq fell from 17,600 to 16,200 points, a sharp decline of 8%. The S&P 500 followed suit, falling from 5,500 to 5,150 points — about 6.5%.

Investors were shaken. Markets, already shaken by macroeconomic pressures, rallied further, and crypto assets began to behave just like high-risk technology stocks.

And the timing couldn’t be worse. As this geopolitical shock unfolded, the global economy was facing growing fears of recession. Add to that the decline in yen carry trading and the rumblings of stagflation, and things looked pretty bleak.

Then came August 5th, now known as “Crypto Black Monday.” Major crypto assets have taken another hit. Bitcoin fell to $53,000, a staggering 20% ​​decline from its highs in late July.

Both Ethereum (ETH) and Solana (SOL) were caught in the same downward spiral, with huge losses. Investors were scrambling, fearing that a large-scale war would break out in the Middle East, which deepened fears of recession.

Fast forward to September 2024, and the conflict has escalated once again. Hezbollah, the powerful Iran-backed armed group in Lebanon, has intensified its attacks on Israel.

On September 20, Hezbollah launched a barrage of rockets into northern Israel, targeting cities such as Haifa, escalating tensions in the region.

In response, Israel responded with hundreds of airstrikes on Hezbollah positions in Lebanon, marking the heaviest exchange of bombardments between the two sides since the 2006 Israel-Hezbollah war. The airstrikes resulted in more than 490 Lebanese casualties, significantly worsening the conflict. .

Then, on October 1, Iran escalated the situation by launching a large-scale missile attack on Israel, pushing the region closer to a broader confrontation.

Despite the intensity of the escalating conflict, cryptocurrency markets responded differently this time. Instead of experiencing a stark downturn, Bitcoin has remained relatively stable, falling only a few percentage points.

As of October 2, Bitcoin is trading at around $61,800, reflecting a decline of around 3% over the past 24 hours but still above the critical support level of $60,000. Meanwhile, Ethereum saw a sharp decline, falling more than 6% and trading at around $2,480.

Liquidity and central bank policies protect cryptocurrencies

One of the main differences between the two periods is the broader macroeconomic environment. Last August, global markets were still grappling with a storm of negative data.

At the time, China’s post-pandemic recovery was stalling, and the US Federal Reserve showed no sign of easing its tight monetary policy. Liquidity was drying up across the board.

Then came the surprise in August, as the Bank of Japan raised interest rates for the first time since 2007. This decision sent shock waves through global markets.

Why? Many investors have been taking advantage of Japan’s ultra-low interest rates by borrowing cheap yen and investing that money in higher-yielding assets, a strategy known as the “yen carry trade.” But when the Bank of Japan raised interest rates, the cost of borrowing the yen increased, forcing investors to unwind those positions.

As a result, they quickly exited riskier assets, including cryptocurrencies, causing prices to plummet. Bitcoin, Ethereum and other cryptocurrencies have fallen into a selling frenzy as liquidity is drained from the markets.

Moving forward to October, the situation looks different. On September 18, the Federal Reserve made a surprise move by cutting interest rates by 50 basis points, injecting much-needed liquidity into the global financial system.

Meanwhile, China has begun implementing a series of economic stimulus measures to revive its faltering growth.

Historically, cryptocurrencies tend to perform well when there is a lot of liquidity in the markets, and that is exactly what we are seeing now. Bitcoin’s recent rise, along with the rise of Ethereum, is largely due to the Federal Reserve’s shift toward a more flexible monetary policy.

But liquidity is not the only influential factor. In recent weeks, fears of a global recession have eased. US jobs data came in stronger than expected, and although inflation remains a concern, it appears moderate.

All of this has helped ease concerns about the US economy’s sharp decline, giving investors more confidence to hold riskier assets like cryptocurrencies.

Another major difference between August and October is how institutional investors view Bitcoin. Since the Fed’s announcement, Bitcoin has seen strong inflows into Bitcoin ETFs, with outflows only occurring for a few days.

Total assets under management for all Bitcoin ETFs have risen, now standing at more than $50 billion. Therefore, in times of political turmoil, such as the ongoing conflicts in the Middle East, Bitcoin actually attracts inflows rather than sparking panic selling.

However, it should be noted that the rise we are seeing now does not mean that the underlying problems have been solved.

The Chinese economy is still struggling to gain traction, the United States is not out of the woods yet, and the possibility of a soft recession still looms. The Fed’s interest rate cuts have provided some temporary relief, but deeper structural issues remain unresolved.

Why markets have remained calm amid rising geopolitical tensions

As tensions escalate between Israel and Hezbollah, it is surprising that markets remain calm, almost indifferent to the escalating conflict.

To better understand the unusual market reaction, crypto.news reached out to industry experts, whose insights reveal a shift in how investors approach geopolitical risks in 2024.

Anna Kuzmina, founder of What the Money, believes this apparent apathy may stem from the deluge of global news. With constant coverage of conflicts and crises around the world, investors may see this particular situation as less impactful than others.

“The limited impact of the current conflict in the Middle East on cryptocurrency and stock markets, compared to previous incidents, may be due to the sheer volume of geopolitical news flooding the market. Investors may simply see this conflict as contained or more focused on inflation and interest rates.”

Kuzmina also highlighted how investor behavior has evolved over time. In the past, geopolitical tensions often sparked sharp market reactions, but today, global and regional markets appear better equipped to absorb such disruptions without panicking.

Adding to the conversation, Daria Morgen, head of research at Changeli, provided another perspective. She points out that cryptocurrency investors, having endured long periods of volatility, are approaching geopolitical risks with a different mindset.

“Cryptocurrency investors evaluate geopolitical risks differently than stock market investors. They often have a greater tolerance for volatility, shaped by the recent bear market and wild price swings.

Morgen pointed to the ongoing nature of cryptocurrency trading as a key factor. Unlike traditional financial markets, which set trading hours, the 24/7 nature of cryptocurrencies allows investors more flexibility to re-evaluate their positions without rushing into panic-driven decisions.

“They have learned to withstand fluctuations, and this conflict, although serious, does not appear to be a trigger for panic – at least not yet.”

While crypto traders appear to be patient, Kozmina points out that participants in traditional stock markets often take a more defensive stance, typically shifting their portfolios toward safer assets when geopolitical uncertainty arises.

Morgen shares a similar view, explaining that the decentralized nature of cryptocurrencies also plays a role. It provides a certain level of protection from shocks that typically shake traditional financial systems.

“Cryptocurrency investors see digital assets as a hedge against traditional market instability. This decentralized nature keeps cryptocurrencies somewhat insulated from global political issues.”

Morgen emphasizes that while geopolitical conflicts can still move markets, the majority of investors are more focused on immediate economic concerns that directly impact their portfolios.

“Immediate economic concerns such as inflation and interest rates overshadow these struggles. Investors react more to global events when they have clear and direct economic consequences.

Kuzmina agrees, noting that in today’s information-rich environment, investors are becoming increasingly selective about news events that trigger market movements.

“Investors are bombarded with information daily. They have become more selective, tuning out the noise unless it directly impacts their bottom line.

While cryptocurrency markets may appear more adaptable in the current geopolitical environment, they are still vulnerable to changes in regulatory policies, which could disrupt this newfound stability.

What to expect next?

The Middle East is still on fire, and although markets have remained calm so far, that does not guarantee smooth sailing ahead.

For now, the main point is to stay alert. The lull we’re seeing may be a sign that the market is maturing, but it’s also a reminder that things can change quickly.

Monitoring global events, central bank policies and market sentiment will be crucial in the coming weeks and months.