Cryptocurrency VS Oil: What should we expect in 2021?
1) Bitcoin has become a hot safe-haven topic, reaching a record high in the last quarter of 2020.
2) Is there any reason to call Bitcoin “digital oil”?
3) In terms of the real economy, the oil may be the top commodity, while Bitcoin is very out of touch.
The outbreak of the new coronavirus in early 2020 has had a ripple effect on a global scale, completely changing many financial forecasts. Since the much-watched Wall Street financial crisis in 2008, investors around the world have tried to isolate themselves from the foreseeable recession for the first time.
When investors turned to traditional assets such as gold and oil as investment safe-havens, Bitcoin has become a hot topic of risk aversion, reaching a record high in the last quarter of 2020.
Digitization and the rise of “digital oil”
As health researchers seek to end the epidemic and restore some kind of normalcy globally, one thing is for sure now that digitalization is inevitable at every level. Under the restrictions of the global blockade, many digital assets, online jobs, payment merchants and online shops have developed tremendously.
Unsurprisingly, this trend has also triggered a new wave of enthusiasm in the financial sector. Many investors have begun to shift their sights from traditional safe-haven assets gold and oil to digital assets. Now, Bitcoin and other cryptocurrencies have also ushered in an influx of institutional investors than ever before.
Compared with the 2017 bull market, Bitcoin is called “digital gold” and emphasized that it is a store of value, which is very common in this cycle. But is there any reason to call it “digital oil”?
“Digital Oil” and Crude Oil in 2020
After suffering a significant value loss in the second week of March 2020, Bitcoin rebounded and became one of the best-performing assets this year. On the other hand, the epidemic blockade restrictions and automobile restrictions have severely hit the demand for crude oil.
In April 2020, Brent oil prices fell to an average of US$18 per barrel, the lowest monthly average price since February 1999. Overall, the price of Bitcoin rose by 318% at the end of last year, while the price of West Texas Intermediate crude oil fell by 22% at the end of the year.
It can be said that in terms of the real economy, the oil may be the top commodity, while Bitcoin is very out of touch. When asked if there is a way to compare them as assets, Chartered Financial Analyst Thomas Kuhn told BeInCrypto: “Bitcoin plays a role just like oil, and its advantage is that it is a fundamental asset that enters the digital asset industry. It provides liquidity and is the foundation layer of all other related values.”
Although gold has performed well this year, reaching the elusive $2,000 mark and reaching a new all-time high, the full-year performance of oil has been relatively flat, especially when investors seek to hedge against the recession.
What will happen to these two assets in 2021?
The uncertainty in the global new crown epidemic has already caused damage to various economies, and the dollar fell to its lowest level in three years at the end of last year. It is foreseeable that in the long run, the global economy and legal currency will become weaker, and their trend has been bad for some time.
Entering 2021, investors may continue to protect their funds, and an important topic throughout the year will be traditional safe havens such as crude oil, or “digital oil.”
On the one hand, oil is gradually recovering from a year-long downturn, and it is likely to move towards the path of global overall demand. Long-term believers will believe that crude oil will never fail and that its intrinsic value is driven by global demand.
However, the dramatic event is that Tesla’s stock rose by 695%, becoming one of the world’s most valuable companies, and also let people see the bright future of electric vehicles. Sooner or later, oil demand will fall, and recovery can only be a fairy tale.
For cryptocurrencies, the bull market after the 2020 halving is already very similar to 2017. Unlike 2017, Bitcoin and other cryptocurrencies have received a healthier welcome by institutional investors and hedge fund managers; mainstream media and public trust have also increased significantly in the past few months.
Some people still raise issues such as the intrinsic value and extreme volatility of cryptocurrencies to devalue this asset. However, Bitcoin is fully motivated to surpass every asset, as it has done in the past decade.
“The strategic reserve of oil provides stability to its price, and at the same time treats it as a geopolitical asset, not abnormal’ commodity. At the level of economic strategy, oil is very much like currency.” Kuhn commented and added: “Bitcoin as a kind of digital oil’ in the new financial system is not unreasonable. From the perspective of digital assets, Ethereum and other similar platform tokens are relatively close, but they only lubricate decentralization The wheel of the mechanism, not like Bitcoin, is more like a foundation, first the concept of the entire industry, and secondly the foundation of stored value. I think it is more fundamental.”
However, in addition to digital assets, if viewed from the perspective of traditional portfolio management, Kuhn believes that this will be a more powerful comparison. He said: “Just as Bitcoin is to digital assets, oil is to industrial assets. The market itself is similar, and the transactions of oil and Bitcoin are very similar assets.”
Problems to be solved
Oil is very sensitive to geopolitics and macroeconomics. In 2020, we saw Bitcoin being affected by the broader market due to COVID-19, and the price was hit for the first time. When talking about whether Bitcoin and oil will converge, or just the two sides reacting to the broader market, Kuhn pointed out that the following issues need to be resolved:
1) When will risk appetite transform into risk aversion?
2) What is the storage capacity of oil and Bitcoin?
3) When there is a risk appetite in the market, oil and Bitcoin are good alternatives to funds, or will they become a false hedging tool when the risk is finally sold?
4) Can their price increase be maintained relatively?
Kuhn believes that the industry may see answers to these questions in the second or third quarter of 2021. “My view is that the weight of a basket of assets with monetary value should depend on the situation. Therefore, until the second quarter or when there are signs of risk in the market, we may consider Bitcoin and oil while reducing our holdings of gold. “,” he added: “Finally, on the issue of risk, it seems that only the central banks, especially the Federal Reserve, can lose their control of intervening in the market. Otherwise, they may continue to provide liquidity to the market. Sex, supporting risk/asset prices until the end of the world.”
Of course, every asset has several forecasts to look forward to, whether positive or negative. Although increasing digitization and the unfortunate COVID-19 pandemic may have given cryptocurrencies some advantages last year, it remains to be seen where this year’s certainty and uncertainty will push cryptocurrencies and oil.
Author: Joshua Esan