The Capital
Published in

The Capital

How Oil prices impact Equities and ultimately Bitcoin (Why I’m shorting Bitcoin)

As oil prices bounce from negative levels, more pain in the markets is to be expected.

Photo by Patrick Hendry on Unsplash

Happy Tuesday, former Cryptosomniacs, and welcome to the new and improved Alpha Trades morning market analysis. Did you watch our video last Sunday? We warned of the pivotal week ahead, and here we are.

Crazy day yesterday, everyone’s aware of how oil contracts for the current month fell into negative territory. Let’s break that down, but first, here’s a summary of what I’m expecting in the next two to six weeks in America and the global economy.

What to expect in the coming weeks:

Things I’m expecting in the next 2–6 weeks ahead:

  • Bond downgrades.
  • Oil company defaults rolling into oil and energy exposed banks (Citigroup + Wells Fargo and a few more).
  • Housing should start seeing a hit soon (ITB already weak).
  • Italy defaults rolling into NL + GER and causing large scale issues in the ECB and Eurozone.
  • US interest rates go negative.
  • The US Dollar explodes up to $100+ again (EMs get crushed against USD).
  • Gold keeps flying up
  • Equities start selling off
  • Bitcoin breaks down

Bond downgrades across the US.

Expect severe bond downgrades, especially in America, where significant companies will be downgraded from BBB status to 888, BBB, or even junk bonds.

Oil companies enter default.

Given the current month’s contracts closed negative, May through June will bring more sell-offs in oil. I expect the bleed in oil will last into the summer months, while August and September are more difficult to predict as their performance depends on the market’s reaction to the economy opening.

The housing sector will feel pain.

Companies tied to home construction are looking frail as defaults and delinquencies roll into the housing sector. This won’t happen next week, but I expect the dominoes to fall soon after that.

The Eurozone faces a shockwave of defaults

Italy’s worsening economic situation is rolling into The Netherlands and Germany, causing large-scale issues in the ECB and Eurozone.

US interest rates are going negative.

Whether it happens in two weeks or six, I expect the value of the US dollar to explode in response. Watch for (DXY) to rocket above 100 and as high as 115 by mid-March.

Gold becomes a contender as equities bleed.

I expect gold to climb in this recessionary environment while equities continue to sell off, based on historical patterns of recession.

Bitcoin breaks down despite the halving.

I scaled into a BTC short from 6950 to 6980 once the price structure broke past 7100 after several failed tests of that level. Remember that these retests are good risk-reward opportunities depending on the larger direction of the market.

BTC should be pressured to sell off further, considering the S&P 500 E-Mini Futures Contract is breaking below a month-old rising wedge (bearish) since yesterday evening. The drop should be significant, but may take days or weeks to conclude. But what about the halving?

Part of the narrative is that BTC is undervalued due to the halvening taking place in May, but that expectation undervalues the economic macro picture. When you see a once-in-a-lifetime event of oil, which is a multi-trillion-dollar industry, having their first forward contract going negative, it’s difficult to believe a $160 billion project like BTC will significantly rise in value for the short or mid term. Calls for BTC to “go to zero” are about as unlikely, but as equities bleed, Bitcoin will drop in correlation until liquidity returns to the market.

For the past two months, BTC’s price action has correlated with equities. Watch the S&P 500 and you can make a fairly accurate guess of BTC’s price direction. I believe BTC could go lower than 3000, which may be discussed in a later video. Now let’s turn to the insane action we saw in oil the other day.

Why did oil go negative and what does that mean?

First, the negative prices witnessed yesterday represented the then-current futures contract. Yesterday the price dropped to -$37 and has since climbed towards $16. The reason prices tanked is due to excess supply and a drastic cut in demand. Oil costs money to store, and storage facilities are nearing capacity. Cushing Oil Storage, based out of Oklahoma, reached nearly 72% capacity yesterday.

Oil-based companies are paying people to take oil off their hands. The issue with that is you can’t just store or dump oil anywhere, unless you want to face the EPA’s wrath. A similar principle applies to oil futures contracts.

Traders didn’t want to buy long contracts because these were physically delivered futures, meaning they’d have to figure out what to do with physically delivered oil barrels. So as demand for long futures decreased, many people sold their contracts so that they wouldn’t have to manage the physical oil.

Futures contracts for the next few months may be slightly more stable, but because global trade is still largely shut down, the sell-off in oil futures is likely to continue. You can already see this happening as far out as July.

This statistic begs restating: If oil prices are above $30, 61% of oil-based companies remain solvent. Oil prices have been lower than $30 for weeks, reaching about $11 for June contract and $20 for July. The oil industry will continue to suffer, and that will roll into banking institutions, such as Citigroup and Wells Fargo, which have heavy exposure to oil companies. If oil companies shut down or begin defaulting on loans, that affects the balance books of the financial sector. The rollover then continues into the overall economy, creating a financial crisis similar to 2007–2008.

Oil spills into the overall economy.

The Oil industry is about 8% of US GDP and is responsible for over 8.5 million jobs. When oil falls, the world feels it. UK oil (Brent), has also suffered, so this is not an event isolated to America.

Comcast dumped $178 million worth of Peloton (PTON) shares while the Dow Jones dropped almost 600 points. While this isn’t directly related to oil, it’s further affirmation that the current effects of the coronavirus are still causing havoc in the overall economy.

Current Positions

  • Short BTC, as previously mentioned.
  • A few days ago, I alerted our group of a EUR/USD trade at 1.087, which sits in a small profit as of this writing.
  • I’m long gold

I hope this was useful, high-impact info you can utilize in your decision-making process. Thank you for tuning in, and we’ll catch up with y’all soon. Cheers.

If you want to learn more about bonds, we cover them thoroughly in the education section of the Alpha Trades community. Check my profile signature.

Disclaimer

Information provided by Alpha Trades, LLC is not intended to be utilized in making any financial decisions and is not a solicitation, nor recommendation to buy, hold, and/or sell a particular product, digital asset, or ICO.

--

--

--

A publishing platform for professionals in business, finance, and tech

Recommended from Medium

Exchange Invest Weekend: 12th Feb.

Friktion partners with Paradigm to bring institutional liquidity to DeFi

MintGate Jam — 7/9/21

ICO Analysis of VideoCoin (VID) — Video infrastructure for the blockchain-enabled internet

Bitcoin all day

0 Confirmation Scam: Bitcoin ATM Trick now Appears on OTC Market!

August 20th Beta Liquidity Mining Distribution

What Are Dynamic NFTs and Where Are They Used?

Get the Medium app

A button that says 'Download on the App Store', and if clicked it will lead you to the iOS App store
A button that says 'Get it on, Google Play', and if clicked it will lead you to the Google Play store
Alpha Trades

Alpha Trades

We distill critical market data to help you make the most informed decisions. Join our educational community of 125+ Advantage members: discord.gg/gewsSZsq5u

More from Medium

Hitesh Eidnani: Bears Dominate Equity, Gold, and Bitcoin; See What Stock/Bond Ratio Hint

The Crypto Queen: Najah Roberts Bringing Nuggets to Vegas in Digital Financial Revolution Tour

The Perfect Money Exists And It Is Called Bitcoin

What Is the Graph (GRT) Cryptocurrency & Why Has It Been Trending Upward Recently