Once again, the world held its collective breath as news circulated about Israeli airstrikes on Iran. The announcement rattled markets around the world, including the crypto industry. Almost every cryptocurrency, Bitcoin, Ethereum, altcoins, etc., experienced significant drops. In light of this, investors are rushing to understand the ramifications and figure out their best course moving forward. Julien Duval analyzes how geopolitical events can trigger market volatility and offers insights for investors to navigate these turbulent times.

Immediately after news of the reported strikes, Bitcoin plummeted. It lost 4.5% within 24 hours, crashing through the $104,000 support to settle at $103,802. Ethereum was even worse off, its value crashing by almost 10% to $2,497. These abrupt declines in crypto values highlighted the extent to which digital assets were vulnerable to geopolitical turmoil. Several large blasts exploded across Tehran, an unprecedented occurrence. According to an unnamed senior Israeli military source, Iran’s nuclear and military infrastructure were specifically targeted in the strikes. The news triggered panic over rising violence and its implications on the worldwide market.

U.S. benchmark West Texas Intermediate (WTI) jumped 7.23% to $72.98 per barrel. At the same time, U.S. Brent crude soared by 7% to $74.23 per barrel, reaching its highest levels in three months. The spike in oil prices, as the realization of a real potential disruption to global energy supplies set in, added additional uncertainty to the markets. From the perspective of crypto investors, this combination of events creates a unique challenge and opportunity. Identifying the underlying forces pushing market volatility will better inform your decision-making process and help you manage your risk more thoughtfully.

The Importance of the Strait of Hormuz

The Strait of Hormuz is a vital and fragile waterway, connecting the Persian Gulf to the Gulf of Oman and the Arabian Sea. This chokepoint is the linchpin of U.S. supply chain and energy security. Thus, the impact of its potential disruption can be dire for the effects it will have on financial markets.

Strategic Significance for Global Trade

The Strait of Hormuz is home to one the world’s most dangerous chokepoints for maritime trade. This route is primary to our goods and commodities moving in this global supply chain. It serves as the critical connection point between the Middle East, Asia, Europe and North America. Any disruption to navigation through the Strait can have cascading effects on global supply chains, leading to delays, increased costs, and potential shortages. The importance of this waterway goes well beyond oil, affecting the trade of most all goods.

Key Oil Transit Route

The Strait of Hormuz is especially bellwether for the global oil market. Almost 20% of the world’s seaborne oil transits through this narrow chokepoint each day. Saudi Arabia, Iran, the United Arab Emirates, Kuwait, and Iraq all rely on the narrow waterway to ship their crude exports. This critical corridor is helping them get to global markets more efficiently. If the Strait closes or is otherwise disrupted, our oil supply will plummet. This drastic cut will lead to prices rising dramatically and significant economic turmoil. This dependency places the region at the center of competitive and geopolitical tensions.

Consequences of Closing the Strait of Hormuz

The temporary closure of the Strait of Hormuz—even if only for 10 to 15 days—would be very serious economic and political ramifications. The secondary effects would be felt by countries everywhere.

Impact on Oil Supply and Prices

A closure of the Strait would be a diplomatic crisis, an oil price crisis, and one day, an energy transition crisis. The large, unexpected cut in supply would cause oil prices to jump dramatically. This dramatic increase has the potential to trigger a worldwide energy emergency. Countries heavily reliant on Middle Eastern oil would face significant challenges in securing alternative supplies, leading to economic hardship and political instability. The downstream impacts would be enormous, touching every sector from transportation to construction to manufacturing.

Global Economic Repercussions

The economic impacts of a Strait closure would reach well beyond the oil market. Increases in energy prices would further stoke inflation, eat into real consumer spending and depress economic growth. Main Street businesses would see their costs skyrocket, increasing the risk of employees being laid off and overall investment going down. So would global trade, as shipping costs soar and hard-won regional supply chains are devastated. The total effect on the world economy would be catastrophic, possibly leading to global recession.

Understanding Major Oil Price Shocks

As with previous oil price shocks, the current one has already made a big splash on financial markets and the global economy. By learning from these historical occurrences, we can gauge how markets are likely to respond during similar future disruptions.

Historical Examples and Their Effects

As we’ve seen from several historical events, the impacts of oil price shocks can be devastating. The 1973 oil shock, caused by an OPEC embargo, pushed inflation, economic recession and social upheaval to incredible heights. The Iranian Revolution precipitated the 1979 oil crisis, making these issues even worse. Recent geopolitical events in the Middle East have assuredly done their part to rattle supplies of international oil. As a result, we have witnessed short lived price surges and greater market instability. These three notable examples highlight both the current and emerging impact disruptions in oil supply have on the global economy.

Market Reactions to Price Volatility

Capital markets tend to respond poorly to oil market shocks. The market outlook is seriously bearish, with the S&P 500 moving significantly lower as investors chew over how much higher energy costs will hurt corporate profits. Alternatively, bonds could sell off because inflation expectations would rise. Countries that import a lot of oil will see their currencies weaken, while those who export oil might see relative strength in its currency. Even in the relatively nascent cryptocurrency markets, oil price shocks have been a clear factor that drive investors to safe-haven assets.

Iran's Motivations for Disrupting the Strait

Knowing Iran’s motives for threatening to disrupt the Strait of Hormuz will be an essential part of determining how significant the risk to financial markets would be.

Political and Economic Factors

There are times when Iran’s actions in the Strait are more politically or economically driven, depending on the situation. Tehran may seek to exert pressure on its regional rivals or the international community to achieve its foreign policy objectives. New US economic sanctions on Iran have led to Iranian threats to disrupt oil supplies. This 2-pronged strategy pumps up prices and maximizes their revenue. These motivations differ based on the geopolitical environment and the situation at hand.

Regional Power Dynamics

The Strait of Hormuz is becoming one of the most contested fronts in the centuries-long, regional fight for control in the Middle East. From Iran’s perspective, the Strait is an important strategic asset. Like Russia, they intend to use it to project their power and influence across the Greater Middle East. In addition, ongoing rivalries with Saudi Arabia, the United Arab Emirates, and other Middle Eastern nations have led to increased tensions in the region. Such shifts in power dynamics worsen the probability of conflict and continue to disrupt the flow of oil through the Strait.

Summary and Implications for Financial Markets

Indeed, the latest escalations in the Middle East have sent shockwaves through financial markets. Israeli airstrikes on Iran, specifically, recently exposed the cryptocurrency sector’s vulnerability to geopolitical instability. The disruption of the Strait of Hormuz alone would send ripples across the globe, with threats to global energy supplies. It would send ripples of economic consequences. For investors, this highlights the need to prioritize diversification, actively manage risk, and remain vigilant in monitoring geopolitical events.

When you face uncertain global conditions, one thing Julien suggests to investors is to engage with alternative investments. Gold has long served as an inversely correlated hedge. We believe investors need to look beyond market fundamentals alone and pay close attention to geopolitical events. Then rebalance portfolios in response. The crypto market can be highly volatile. The waters can be treacherous but the rewards are plentiful for those who dare to take chances. It’s important to do your homework, know the risks, and downside before making any investment into any digital asset.

Charting the financial markets landscape amid an intense geopolitical storm is no easy task. It requires a unique combination of vision, rigor and willingness to pivot as unpredictable events unfold. By staying informed, managing risk effectively, and considering alternative investment options, investors can protect their portfolios and potentially profit from market volatility. The market doesn't care about your feelings. It only cares about precision.