10 lessons from the negative oil price for Bitcoin

As if the coronavirus crisis was not enough for the world’s economy, now the oil price plummet to a record low of $23 a barrel for Brent Crude Oil. As hilarious as it may sound, the WTI oil price reached negative $37.63 a barrel at some point! Bitcoin slid 3.5 percent on Monday to about $6,900, a pretty lukewarm reaction for the infamous volatile cryptocurrency market. We have gathered 10 lessons Bitcoin owners and traders can learn from the negative oil price.


Lesson 1) Low oil price is deflationary in the short term. 

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; that is despite trillions of dollars of money injections from the Federal Reserve and other central banks.


Lesson 2) Bitcoin doesn’t have storage considerations like oil.

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.


Lesson 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. This is an important lesson to learn from the negative oil price.


Lesson 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 underscores 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. New signs of just how volatile the oil market can be might undercut delays in bitcoin ETF approval.


Lesson 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 in his speech that he and his colleagues are doing everything in their power to bring economy back on its track. 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.


Lesson 6) Plummeted oil price shows the world is changing rapidly.

Many professionals, representing half the economy, based on rough estimates, have been able to continue doing their jobs from home. The rapid shift has allowed the economy to avoid deeper economic damage, especially critical with some 22 million jobless claims filed in the U.S. 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.


Lesson 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 like Saudi Arabia, Russia and Mexico. On top of that, U.S. producers are likely to shut down 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.


Lesson 8) Wait! More market surprises are yet to come: 

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.


Lesson 9) Mining activities probably won’t suffer 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.


Lesson 10) Oil market’s flame is dying down: 

Cameron Winklevoss, president of the cryptocurrency financial company Gemini, pictures a gloomy future for the black gold. He 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 like Morgan Stanley and Goldman Sachs as a grown-up market, now starts to give way to digital commodities.


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