Although worries about Q1 2020 earnings of several major U.S. banks that are being reported this week seem to have dragged Bitcoin below the $7,000 level, Bitcoin HODLers continue to maintain optimistic medium-term and long-term outlooks based on reasons that are outlined in this article.
As Reuters reported on March 8, approximately five weeks ago, crude oil prices suffered their biggest one-day loss since the 1991 Gulf War after two of the world’s top oil producers started a price war that threatened to “overwhelm global oil markets with supply.”
This oil price war apparently was started by Saudi Arabia after Russia refused to support the Organization of the Petroleum Exporting Countries (OPEC) plan to cut oil production in response to the large fall in demand caused by the world’s response to the COVID-19 pandemic. One theory about the reason for Russia’s refusal to go along with OPEC’s plan was that it feared that such a move would help U.S. oil producers.
During the weekend of March 7-8 2020, Saudi Arabia decided to protect its market position by dropping its oil price and increasing its oil output. Russia then countered this move by doing the same.
As the Reuters report explained, “OPEC, Russia and other producers had cooperated for three years to restrain supply in a group known as OPEC+” and this price war meant that other countries in OPEC+ were now “likely to raise supply and cut prices to compete, adding to a market already awash with crude.”
As Goldman Sachs said back then:
“The prognosis for the oil market is even more dire than in November 2014, when such a price war last started, as it comes to a head with the signiﬁcant collapse in oil demand due to the coronavirus.”
The subsequent huge drop in oil prices (to 16-year lows) triggered panic selling in the U.S. stock market, and on March 9, the Bitcoin price fell over 10% to around $7,800, its lowest level in two months.
Worried by the damage to the American oil companies caused by a price war that had resulted in U.S. crude oil prices falling below $20 a barrel (close to their 18-year lows) on March 30, President Trump managed to put sufficient pressure on Saudi Arabia during the past two weeks to help the OPEC+ alliance and the Group of Twenty nations (aka “G20”) reach a historic oil production cut deal on Sunday (April 12) evening following an emergency video conference:
Ed Morse, the head of commodities research at Citigroup Inc., told Bloomberg yesterday:
“Unprecedented measures for unprecedented times: Unprecedented in historical discussions of production cuts, the U.S. played a critical role in brokering between Saudi Arabia and Russia for the new OPEC+ accord.”
What this deal means is that OPEC+ will “cut 9.7 million barrels a day — just below the initial proposal of 10 million.”
This is how President Trump announced the deal on Twitter last night:
The big Oil Deal with OPEC Plus is done. This will save hundreds of thousands of energy jobs in the United States. I would like to thank and congratulate President Putin of Russia and King Salman of Saudi Arabia. I just spoke to them from the Oval Office. Great deal for all!
— Donald J. Trump (@realDonaldTrump) April 12, 2020
Excitement about the end to the oil price war and its likely positive effect on U.S. stocks, helped both U.S. stock futures and Bitcoin to go higher last night.
According to data by CryptoCompare, by 17:10 UTC on April 12, Bitcoin was trading at $7,192, up almost 5% higher than it was just six hours earlier.
So, how come Bitcoin is currently (as of 09:10 UTC on April 13) hovering around the $6,700 level?
Well, that probably has to do with the fact that in premarket trading, U.S. stock futures are down: 1.22%, 1.25%, and 1.10% for the Dow futures, S&P 500 futures, and Nasdaq futures respectively. And as we have seen during the past several weeks, Bitcoin is been showing a positive correlation with S&P 500.
Morningstar pointed out on March 6:
“There’s an old saying in the financial markets that, during a time of crisis, ‘Correlations go to 1.’
“The meaning here is that when there’s a panicked rush to the exits–as global stock markets have seen amid the spread of the coronavirus–all stocks are punished equally and indiscriminately.”
Larry Sermak, the Director of Research at The Block talked about the current short-term correlation between Bitcoin and the S&P 500 back on April 7:
Everyone who's longing BTC here is effectively long S&P 500. There is some small divergence but the correlation is undeniable and nowhere close to going away. Bitcoin was even trading sideways over the weekend because it didn't know what to do pic.twitter.com/lkvcd99IkR
— Larry Cermak (@lawmaster) April 7, 2020
Just to clarify, obviously I expect this will go away. But in the current environment, as defined by the global equity sell-off, SPX has been leading all major directional moves. Obviosuly I don't think that they should be traded interchangeably, especially for longer term
— Larry Cermak (@lawmaster) April 7, 2020
So, the next question is why are U.S. stock futures down?
This is the week that many U.S. companies are reporting their Q1 2020 earnings; amongst them are major banks such as JPMorgan Chase (JPM) and Goldman Sachs (GS), which are, according to CNN Business, reporting during the first half of this week.
This morning’s CNN report also mentions that “US retail sales and industrial production reports for March are also scheduled to be published on Wednesday, which will offer a further look at the toll coronavirus has taken on the country’s economy.” Furthermore, on Friday (April 17), China is “scheduled to release its first-quarter GDP figures that will reveal how badly the coronavirus crisis damaged the world’s second largest economy” with many economists “predicting the country’s first contraction in decades.”
Since the world is still in the grip of the COVID-19 pandemic, why do most Bitcoin HODLers still seem very optimistic about the medium-term and long-term future?
Here are the main two reasons:
First, recent actions by the Federal Reserve (aka “the Fed”), the central bank of the U.S., show that it is determined to use monetary policy to counteract the massive slowdown in the U.S. economy no matter how much “money printing” it takes and despite the fact that in the medium to long term, this is likely to lead to high inflation.
The U.S. has also signalled through the U.S. Congress approval of a $2.2 trillion stimulus package late last month that it is also willing to use fiscal policy to fight the economic impact of COVID-19.
Other countries that have been badly hit by COVID-19 will probably be forced to follow.
Most Bitcoiners seem to agree with Tyler Winklevoss, Co-Founder and CEO of crypto exchange Gemini, when he says that Bitcoin can help to protect investors against the “money printing disease”:
Bitcoin is the only vaccine in the world that can give you immunity to the money printing disease.
— Tyler Winklevoss (@tylerwinklevoss) March 26, 2020
Second, there are signs that the U.S. and some European countries (such as Austria and Denmark) are preparing to ease their lockdown measures and restart their economies.
For example, according to a report by AP News that came out earlier today, Dr. Anthony Fauci, the director of the National Institute of Allergy and Infectious Diseases (NIAID), said on Sunday that restrictions could be easied in parts of the U.S. as early as next month:
“We are hoping that, at the end of the month, we could look around and say, OK, is there any element here that we can safely and cautiously start pulling back on? If so, do it. If not, then just continue to hunker down.”
Third, Bitcoin’s next block reward halving is less than a month away, and most Bitcoiners seem to believe that the reduction in supply caused by this event along with growing awareness of and interest in Bitcoin, especially among millennials, is likely to push the price of Bitcoin higher in the months following the halving (just as we have seen in the case of the previous two Bitcoin halving events).