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% 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.
So what are the takeaways from the unprecedented oil-price sell-off? CoinDesk gathered the views of crypto-market traders, analysts and executives. (Quick teaser: Bitcoin suddenly doesn’t look so volatile compared with oil, as noted by pro-crypto twitterati here and here.)
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 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 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.
Tweet of the day
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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