Cryptocurrency and Oil
Crypto-currencies such as Bitcoin represent both a new form of global currency and an investment vehicle. The groups performance is currently somewhat inverse to traditional assets. This is due to the nature of the currency being outside the scope of centralized banking.
The Cryptocurrencies Index 30 (CCI30) is the most notable measure of the crypto asset class. It is an index of thirty cryptocurrencies used to gauge the market. According to the CCI30, one can expect the bitcoin index to function similar to gold — as a hedge against fiat currency. The chart below illustrates this fact with gold in blue and the U.S. Dollar in orange.
However, notice that the inverse properties are not perfect. At times, the U.S. Dollar is higher than gold — sometimes much higher. In June 2017, the U.S. Dollar was much higher than gold. Then from January to May of 2018, the U.S. Dollar declined against gold.
A similar pattern appears with the U.S. Dollar Index with an inverse correlation of the CCI30. Confirming some relationship between cryptocurrency, gold, and fiat money. So, how does that relate to oil?
Oil and the U.S. Dollar
Another notable correlation is the U.S. Dollar and Oil. According to Registered Investment Adviser, David Templeton, “As it relates to oil though, there is an inverse correlation between the dollar and the price of oil. So as the dollar weakens or declines, which has been the case since late 2016, oil prices move in the opposite direction or increase.”
This points to a correlation between oil and gold — being that gold also moves opposite of the U.S. Dollar. However, there has been a few times when oil prices and the U.S. Dollar have moved in the same direction, making it close to the relationship between gold and the U.S. Dollar.
The reason for this is most likely the supply of oil. Countries like Venezuela and Saudi Arabia control much of the worlds oil supply. By economic standards, they are considered emerging markets — removing some of the dollars relationship. In addition, the U.S. Dollar is no longer the global currency for oil — further separating the two.
Moving forward, the inverse relationship between the U.S. Dollar and oil will probably become less apparent. Mostly fueled by other currencies being used to purchase oil — such as the Euro and various cryptocurrencies.
Cryptocurrency and Oil Futures
Venezuela has been under an economic crisis for years now. Despite efforts by their central bank, people living in that country have been moving to Bitcoin as their working currency.
This move prompted the Venezuela government to develop its own blockchain currency that is backed by oil reserves called El Petro. It has central fiat style control and properties of an oil future. So far, it has not been the stimulus imagined by it’s founders.
In March 2018, the New York investment firm Signal Capital Management announced they too were launching a blockchain based cryptocurrency backed by oil and gas reserves. Called OilCoin, it has yet to become available — expecting an Initial Coin Offering (ICO) sometime in late 2018.
The question for OilCoin and the sure to be copycats is how will the correlation occur between the currency and traditional oil futures? Unlike Tether, a crypto-coin pegged to the U.S. Dollar, the oil based currencies are not so finely defined.
Oil Pricing Influences
In oil production, the times are a changing. Saudi Arabia and Russia are raising production while Iran and Venezuela may be cutting back. Furthermore, Iran is demanding payments for oil in Euro and Venezuela is more concerned with future speculation than current production.
These elements alone create volatility while reducing many of the past correlations. Osama Rizvi, contributor to Oilprice.com, states, “while [oil] prices can undoubtedly go higher, the ‘new normal’ for oil prices is yet to be determined.”
As one investor put it, “plunging output in Venezuela, unstable Libya, structural declines in Angola, falling Chinese oil output, structurally declining Mexican oil output, falling output in Algeria,” during a conversation on oil prices. Not to mention the effect of tariffs being implemented by the United States.
Oil pricing is a complex web of geopolitics with a seemingly endless number of variables. Any number of these could be causation for the U.S. Dollar’s inverse relationship with oil prices.
Oil Prices an the CCI30
Cryptocurrency represents the future of global trade. A key component to this is oil. So far, the CCI30 is inversely correlated to the U.S. Dollar. Oil is also inversely correlated to the U.S. Dollar. Does this mean oil and the CCI30 are inversely correlated too?
In July of 2017, the CCI30 lost value while oil rose in price. However, from November 2017 to January 2018, the CCI30 was in an upward trend while oil prices also climbed. As of June 2018, oil continues to climb while the CCI30 is in a downward trend.
Thus, the correlation is not fully realized. In a previous article, a case was made for a correlation between emerging markets and Bitcoin. Since oil is influenced by many emerging market countries and crypto is inversely correlated with fiat currency, a relationship must exist.
However, no relationship between assets is perfect. There are too many variables and additional random elements that make it difficult to profit from asset relationships. Even oil and gold sometimes move with the asset they are being used to hedge.
The expectation is that the CCI30 will closely move in relation to oil. To what point and when is not yet realized. Feel free to comment with your thoughts on the subject below.
Thank you for reading.
