Negative oil, nationalism, recession and what it means for Bitcoin
Negative $37.63. Yes, negative $37.63. This is the price of WTI crude oil for May delivery. It is the first time in history that oil price becomes negative. Who would have thought the black gold could worth less than nothing, what a crazy world we are living in.
How does this all start?
Well, it all started from a bat in Wuhan… which put most of the global economic activities to a stop and led to a reduced demand for oil. At the same time Saudi Arabia and Russia couldn’t reach an agreement on reducing oil production. So Saudi Arabia started a price war by producing even more oil while the global demand has dropped significantly. Many believe this is a strategic move by Saudi and Russia to purposely destroy the oil industry in the US, which is the largest oil producing country in the world, and only 3 months after it became a net oil exporter.
Without intervention, many US oil companies will bankrupt which may cause a financial crisis.
Many US oil companies are funded by debt which is backed by their oil reserves. According to OnyxPoint Global Management, the reserve-based loan (RBL) market is worth more than $200 billion. When oil price remains at a low level, the value of the oil reserves decreases, which will prompt banks to cut the amount of credit to these oil companies. The combination of reduced revenue and less credit will push oil companies off the cliff. According to Rystad Energy, in a $20 oil environment, 533 US oil exploration and production companies will file for bankruptcy by the end of 2021. At $10, there would be more than 1,100 bankruptcies. When these oil companies bankrupt, the $200+ billion debt will be at risk, and millions of workers will lose their jobs, which could cause the next financial crisis.
With intervention, it will mean more money printing and more nationalism
Oil is a strategic resource. It is very unlikely that the US government will watch Saudi and Russia destroy the US oil industry without any intervention. It is very likely the US government will use a combination of interventions, including buying as much oil as possible for the Strategic Petroleum Reserve, issuing low interest loans to US oil companies, and implementing a tariff or ban oil import. These interventions can’t be achieved without more money printing, more closed boarders and further rise of nationalism.
The danger of raising nationalism coupled with a recession/depression
Nationalism across the globe was spreading fast with Covid-19 ever since the beginning of this year. From discriminations against Asians wearing masks in February to Germany ceased Switzerland’s medical supplies in March, to Chinese landlords kicked out their African tenants in April, to American suspended all immigration now, nationalism is spreading like a virus, and coupled with global economy downturn it might be more dangerous than virus. And history has already taught us what would come out of this disastrous recipe.
In 1929, the stock market crash in the US has started the decade long great depression. People in financial ruins wanted a strong leader to deliver them out of despair. This caused the rapid raise of communism and fascism. For example, in Germany, before the depression struck, in 1924 the Nazis party was only winning 3% of the vote, and in 1932 it’s support has grown to 33%. Also during the great depression all countries tried to protect its own industries by closing the boarders for trade and raising import tariffs, which caused international trade to drop by 65% between 1929 and 1934. The trade war was soon followed by a real war.
This sounds dangerously familiar with what’s happening in the world now. Western countries are on the path to move manufacturing back to their own countries, increase tariffs for imported goods, restrict immigration. If this is not enough, a number of countries including US, UK, Germany and India all demanded China to pay for the damage caused by the virus. This is not the same with Nazis and the Jews, but both are channeling the anger of the society towards one particular target. We already know what the result will be like. With the US election coming up, it won’t be a surprise if more nationalism ideologies are being promoted by both candidates.
Change is good for Bitcoin
With all these economic and political uncertainties, it represents a huge opportunity for Bitcoin. Afterall, the crumble of the old system will make space for the new.
A perfect time to tell the story of Bitcoin
Bitcoin is designed to be a monetary system. All monetary systems depend on faith. When more people believe it’s going to succeed, more money will flow into it, and the rising price will attract even more people into it and make the price less volatile. The self-fulfilling prophesy starts from making people believe in a story. And there is no better time to preach the Bitcoin story than in crisis, when people see the inefficiencies of the current system right in front of their eyes.
They will soon see the purchasing power of their asset/income being diluted by unlimited money printing. They will soon realize the problem caused by money printing favors the rich and punishes the middle class and the poor. The rich are shield from inflation by having access to much better investment advice and opportunities, whereas the people less well-off will have worse investment opportunities and feel more painful with the rising living costs.
They will also see an economy fueled by debt and fractional reserve banking are more susceptible to cycles of big fluctuations. In a no debt world, when someone failed from a venture invested with their own money, only that person is impacted. In a debt world, when someone failed from a venture invested with borrowed money, the bank will lose money and will cut down lending from similar businesses and make more people feel the pain and more businesses to fail.
It is not necessary the new system has to be better than the old in every way. As long as more and more people believe the new system is better than the old in some way, and willing to use it as an alternative investment, the self-fulfilling prophesy will be on the right track. Bitcoin was born in the last financial crisis. It is designed to be a better value preserving asset than the fiat we are using now. In this uncertain time, a story like this will sell very well.
The get rich quick story about Bitcoin will also fly in the depression
If the story about faith is not enough, a get rich quick story will sure to capture some. With the stock to flow model so widely known, the $80k, $100k Bitcoin prospect will definitely lure some people into Bitcoin. According to a study on people in Iceland before and after the 2008 recession, people are more likely to buy lotto tickets or scratch cards during the recession, especially those who are experiencing financial difficulties. This is because the possibility to improve their financial situation by winning large jackpots with low initial stakes becomes more enticing. For the exact reason people may buy a small amount of Bitcoin regularly and hoping it would go to the moon.
In summary, the world is facing many uncertainties today, the existing systems and world order will be challenged by rising powers in this chaotic time. Amid these uncertainties, it’s a perfect opportunity for the Bitcoin story to be told and passed on.
