Iran Has Never Implemented Threats to Close the Strait of Hormuz: Should Crypto Investors Worry Now?

Iran, situated to the north of the waterway, has repeatedly threatened to disrupt the supply of crude from the resource-laden areas of the Persian Gulf to international trade routes. In fact, it wouldn’t be a proper escalation of conflict in the Middle East without the traditional domestic face-saving tactic emerging.  

Iran’s playbook 

As far back as 2011, Iran’s then Vice-President Mohammad Reza Rahimi announced that the passage would be closed if western sanctions were widened against Iran. Seven years later, Iranian officials again threatened to block the waterway after the US exited the JCPOA, a nuclear non-proliferation treaty negotiated under the Obama Administration.  

On Sunday (22 June), the Iranian parliament voted to close the Strait, triggering concerns in countries such as Saudi Arabia, Iraq, Qatar and the UAE, which, along with Iran, see most of their oil exports pass through the channel.  

The potential blockage also caught the attention of some investors. Oil briefly advanced above $80 a barrel on Sunday while investors sold stocks and offloaded Bitcoin and other crypto assets amid concern for Middle East insecurity. 

Oil implications 

Closing the Strait of Hormuz would likely cause an immediate spike in oil prices, according to analysts at investment banks including JP Morgan and Goldman Sachs. 

Based on Sunday’s inverse movement of crypto trending down while oil climbed, one thesis is that tokens would fall heavily in the event of a blockage of the maritime route. 

However, investors have yet to reach a consensus if cryptocurrencies are a hedge, or a risk asset. Geopolitical events have provoked inconsistent price reactions in the crypto markets since Bitcoin emerged about 15 years ago.  

Chokepoint  

Analysts from Barclays warn that if Iran closes the Strait, oil prices may spike above $100 per barrel. The world would also face intense energy disruptions that businesses and consumers would immediately feel. If this unprecedented event were to take place, past behaviour during previous bouts of crisis and strife indicate that investors would quickly move to offload risk-assets like stocks and crypto. 

So far, the conflict, while destructive, has been contained. It is limited to long-range rocket and airpower exchanges between Israel and Iran. The US has become involved, but from a sanitized distance using stealth bombers. Soldiers and sailors of these three powers have not fought one another directly.  

Immediate consequences

This may offer an explanation why crypto has thus far stabilized despite price moves in reaction to dramatic headlines. However, closing the Strait would carry two immediate consequences that may all but extinguish investors’ appetite for risk:  

• Iran would intensify the escalation, placing its naval vessels in a direct standoff with the US Fifth Fleet, and other navies including those of Oman, the UAE, and Saudia Arabia which are stationed in the Gulf.  

• Global oil shortages would be felt quickly. Disrupted trade, and macroeconomic uncertainty would have immediate inflationary impacts triggering selloffs and a run on safe-haven assets. 

Nic Puckrin, Founder of Coin Bureau, an educational crypto service, noted that Bitcoin’s short-term price action depends almost entirely on Iran’s next decision regarding the Strait.  

“The biggest risk is if Iran were to close the Strait of Hormuz, which ferries nearly 20% of the world’s oil supply,” he wrote on Friday. “If it does, oil will see a massive spike, and risk assets will fall off a cliff. And, if this happens over the weekend, the market that trades 24/7 — crypto — will once again take the hit.”