U.S. oil futures prices turned negative Monday for the first time ever. Is it good or bad for bitcoin?
The coronavirus pandemic has so completely upended the global economy that energy demand has fallen off a cliff. People are barely driving. People are barely flying.
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The imbalance came to a head this week as oil storage tanks started to fill up, forcing traders to pay extra to get rid of their delivery obligations – resulting in negative prices. The May futures contract on West Texas Intermediate crude, which expires Tuesday, tumbled to minus $37.63 a barrel, from a positive price of about $30 on Friday. The June contract slid 15 percent to about $21 a barrel, leaving the black gold down more than 60 percent in 2020.
Bitcoin slid 3.5 percent on Monday to about $6,900, a pretty tepid reaction for notoriously volatile cryptocurrency markets.
1) In the short term, falling oil prices are deflationary. Drivers will need less money to pay for gasoline once they return to driving. Airlines will pay less for jet fuel. Plastics manufacturers will see lower input costs. More broadly, for bitcoin traders who see the cryptocurrency as a hedge against inflation the oil-price crash offers a warning of how deflationary the coronavirus-driven economic recession might turn out to be – despite trillions of dollars of money injections from the Federal Reserve and other central banks.
"If you want to view bitcoin as an inflation hedge, this whole thing is going to put some pressure on bitcoin as well," says John Todaro, director of research at TradeBlock. "The dollar right now is really strengthening against all assets."
2) As a commodity, bitcoin doesn't have storage considerations like oil – or physical delivery issues like gold. Futures markets with physical delivery require traders to come up with the goods if they own a contract going into the expiration date. There's little likelihood that delivering bitcoin would ever collide with physical capacity constraints.
"The oil markets are yet another inefficient legacy system that needs to be disrupted," Jeff Dorman, chief investment officer of Arca Funds, wrote in an email. "The fact that it is physically impossible to take delivery of a barrel of oil shows that this system, like many, is completely broken and in need of change."
3) Amid this year's economic and market turmoil, bitcoin is holding up. A study published last week by researchers at the Federal Reserve's Kansas City branch noted that historically, 10-year U.S. Treasury notes have worked well as a safe-haven asset "consistently," gold "occasionally" and bitcoin "never." But so far this year, bitcoin is down just 3.8 percent – nearly holding its own against the Fed's own U.S. dollar. Gold is up 12 percent, but the Standard & Poor's 500 Index of U.S. stocks is down 13 percent. Oil's price crash makes bitcoin look stable by comparison.
"For all those who've challenged bitcoin's use as a store of value or the narrative that bitcoin hasn't held its value all that well during the crisis, I beg to differ," Mati Greenspan, founder of the cryptocurrency and foreign-exchange analysis firm Quantum Economics, wrote in an email to clients.
4) A bitcoin exchange-traded fund application might now compare favorably with oil ETFs. Bitcoin prices tumbled 40 percent on March 12 as investors and traders across all financial markets scrambled into cash. Such volatility underscore the risks of cryptocurrency markets, and the U.S. Securities and Exchange Commission has thus far refused to approve a bitcoin exchange-traded fund (ETF). (Aside from high volatility, the market has also been hit by market-manipulation allegations.) But the oil market, which has several approved ETFs , operates in the shadow of OPEC, an international cartel of oil-producing nations that attempts to set the price via output quotas. New signs of just how volatile the oil market can be might undercut some of the reasons for delaying a bitcoin ETF approval.
"A bitcoin ETF is too risky but can I interest you in options on levered oil ETFs?" Juthica Chou, former COO of the bitcoin-derivatives company LedgerX, tweeted on Monday.
5) More government bailouts are likely, along with more central bank emergency lending. With oil prices crashing, debt defaults are likely to surge in the energy industry. Banks might face higher loan losses, and bond markets could become increasingly wobbly. Federal Reserve Bank of New York President John Williams said last week in a speech that he and his colleagues "are dedicated to doing everything within our power to support the functioning of financial markets and help put the economy on a strong footing." It's unclear what the Fed could do for the oil market, or oil companies – or, for that matter, the next industry to falter under the economic toll. Given the assurances of Fed officials, it's hard to rule out more stimulus. That could mean more inflation once the economy recovers and demand returns.
"They're going to pump more dollars into the system," Todaro said.
6) The drop in oil demand shows how rapidly the world is adopting new technologies. CoinDesk reported last month that remote working has been one of the unsung heroes of the coronavirus crisis; many professionals, representing half the economy, based on rough estimates, have been able to continue doing their jobs from home. The rapid shift – thanks, Zoom! – has allowed the economy to avoid deeper economic damage, especially critical with some 22 million jobless claims filed in the U.S. over the past four weeks. Bitcoin, along with digital-asset markets more generally, could benefit as more commerce is done via the Internet, reducing the usefulness of germy paper bills. Oil might be a loser.
"Technology has made oil both cheaper to produce and more efficient to use, which has slowed demand," Rich Rosenblum, a former Goldman Sachs managing director of oil trading who now leads the markets group at the digital-asset trading firm GSR, wrote in an email. "In contrast, cryptocurrency is a futurist product, benefiting from the continued march towards a technologically interconnected existence."
7) Unlike oil, bitcoin's supply is predictable. The price plunge in the oil patch already has led to supply-cutting agreements by giant state producers including Saudi Arabia, Russia and Mexico, and U.S. producers are likely to shut production in response to falling profitability. Bitcoin miners might drop out of the network when prices tumble – or, perhaps, after next month's rewards halving cuts their profitability. But issuance of new supply is strictly regulated by the cryptocurrency's underlying computer programming when the blockchain network was launched 11 years ago.
"Unlike oil, bitcoin's rate of emission is controlled by its own protocol and does not change based on geopolitical events," Joe DiPasquale, CEO of the cryptocurrency hedge fund BitBull Capital, wrote in an email. "The crash in oil prices is a part of the current economic crisis, which is also witnessing mass fiat currency printing, which is devaluing wealth around the world. In contrast, bitcoin is limited in its total supply and its rate of emission actually decreases with time, making its supply curve much more predictable."
8) More coronavirus-related market surprises are likely in store. After swinging wildly earlier this year, bitcoin prices have stabilized in recent weeks in a range between roughly $6,400 and $7,400. One reason might be that the depth of the coronavirus-induced recession is still unknown. For weeks some oil industry executives have been warning of the potential for storage facilities to fill up without big production cuts. But not until Monday did the oil futures market witness negative prices.
"Bitcoin is trading sideways because we still don't really know what the economic shakeout is going to be," Todaro said.
9) Miner profitability probably won't be affected too much. Many big bitcoin miners use long-term power supply contracts to lock in wholesale electricity prices. So even if a steep decline in oil prices leads to lower costs for other generating fuels, such as natural gas, there might not be an immediate pass-through in terms of lower production costs for bitcoin miners.
"It's too much of a tertiary impact," Rosenblum said in a phone interview. By contrast, if bitcoin prices don't double in tandem with the halving in May, the crypto-mining industry might see a shakeout similar to "what's just happened in the oil industry."
10) Bitcoiners are tired of all the shade throwing. Cameron Winklevoss, president of the cryptocurrency financial company Gemini, tweeted that "oil can no longer be considered a reliable store of value." Few investors probably ever saw it as that. But the broader point is that oil, long embraced by Wall Street titans including Morgan Stanley and Goldman Sachs as a grown-up market, now looks pretty janky in its own right. A review of #cryptotwitter on Monday revealed the schadenfreude was palpable.
"Whatever fingers are being pointed at bitcoin, it seems like it's much worse in the traditional commodity markets in terms of the massive dislocation," Rosenblum said. "It takes away some of the criticisms of bitcoin being a funky market."
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Trend: Bitcoin is looking weak, having printed losses on Monday alongside (but nowhere near as bad as) the crash in oil prices. Equity markets are down, too.
The cryptocurrency is trading around $6,820 at press time with the daily chart reporting bearish conditions. For instance, Bitcoin's 4 percent drop on Monday confirmed a bearish lower highat $7,300.
"On the daily chart, we have a lower second top," Chris Thomas, head of digital assets at Swissquote Bank, told CoinDesk.
Monday's price slide also validated the weakening of the upward momentum signaled by the MACD histogram, an indicator used to identify trend strength and trend changes. As a result, a drop to $6,450, the lower end of the recent two-week-long trending range, may be seen.
The cryptocurrency faced selling pressure on Monday, as West Texas Intermediate oil (WTI) dropped below zero for the first time, underscoring the collapse in demand caused by the coronavirus pandemic and forced investors to stocks.
Sentiment remains fragile on Tuesday with the global equity markets still feeling the after effects of the oil price slide. At press time, major European equity indices are flashing red and the futures tied to the S&P 500 are reporting a 0.45 percent decline.
Notably, markets are again buying the U.S. dollar amid a risk-off mood, as evidenced from the dollar index's 0.30 percent rise. Meanwhile, gold, a classic haven asset, is flatlined around $1,710.
With dash for cash boding well for the greenback and equities feeling the pull of gravity due to recession fears, the path of least resistance for bitcoin appears to be on the downside.
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