Oil or Crypto? Liquid gold vs. digital gold as a store of value

Black gold. Oil is the blood that runs through the veins of the global economy. Even today, as discussions about climate change and government schemes conjure up visions of a world running on renewables in the future, it is hard to imagine a world in which oil does not continue to play a central role in global and geopolitical economics. Just about every industry in the world has some dependence on oil, many critically.

At the start of this year, oil was trading at just over $63 a barrel, a price which appeared to be in oil’s new “normal” range of somewhere between $50 and $70 a barrel. But, over the course of the last 12 weeks, as demand has dried up and output has increased to record levels, history has, once again, been re-written. The oil price has slumped to record lows. So low, in fact, that if you had been trying to buy oil on the 20th of April 2020, you’d have been paid $37.63 a barrel for the pleasure of taking West Texas Intermediate (WTI), the benchmark for US oil. It is hard to imagine that, in 2008, just before the global economy went into melt-down as a result of the financial crisis, the price of oil peaked at over $130 a barrel. It has never hit those heady heights again.

Yesterday’s negative oil prices were a quirk of the system. Reported oil prices actually reflect the future price of oil, specifically the price that traders are willing to pay for the delivery of the physical oil on a specified future date. In reality, traders do not really want to take delivery of oil, so (in normal times) they would usually roll these contracts over or sell them to someone that did want oil. WTI futures (as these contracts are called) for May are due to expire today (21 April 2020) and, with demand for oil being virtually non-existent, traders could not sell their futures or roll these over yesterday. After all, there are logistical concerns and costs to taking delivery of oil, most notably storage and, right now, storage capacity is running low. So left with the options of finding storage or paying for someone else to take the oil issue off their hands, traders really had no choice but to pay.

The differing fortunes of oil and BTC over the last 12 years has been startling. In July 2008 oil prices peaked at over $130 a barrel. At the same time, a person (or persons) by the name of Satoshi Nakamoto was preparing to release a paper on a cryptographical breakthrough which would allow for the processing of trustless transactions through a peer-to-peer electronic cash system using a form of digital currency called bitcoin (BTC). That paper would be released a few months later, in October 2008, and the Bitcoin network would launch in January 2009.

Whilst the oil price has, in effect, suffered a long-term decline over this period, the price of BTC (minus the volatile spikes) has generally trended upwards and appears to have found a price range between US$5,000 and US$10,000 over the last 12 months. Bitcoin was, in fact, the best performing asset of the 2010’s. Closing 2019 at just over $7,200, the price of bitcoin had risen 9 million percent since July 2010. And whilst demand for oil has slipped away, causing a total collapse in the oil price, demand for BTC and other top cryptocurrencies appears to be holding steady.

The BTC price today is virtually flat compared to the start of the year and has lost 30% of its value since its 2020 peak in early February. In comparison, the Dow Jones (which tracks the 30 largest companies trading on the NYSE) has lost 25% and WTI oil 80% versus their 2020 peaks. Today BTC and some cryptocurrencies look like a better store of value than oil and many stocks and commodities. This is despite noted economic commentators such as Nouriel Roubini (otherwise known as Dr Doom) suggesting, back in 2018, that cryptocurrencies such as BTC are worthless scams and that their prices “will go all the way down to ZERO”. Some cryptocurrencies have indeed disappeared but is that any different to companies going into liquidation on stock exchanges and isn’t this to be expected in what is, still, a nascent industry? Sure, buying crypto and hoping for a repeat of BTCs success may be in the realms of fantasy, but there are many great crypto projects today whose distributed ledger technology developments offer great promise and investing in these entities is no different to investing in technology firms and start-ups.

Negative oil futures are evidence of investors’ short-term memories. In 2016, faced with a glut of supply, the price of oil slumped to $23 a barrel. Today, with economic activity at a near standstill globally, it could be argued professional investors should have seen this coming. Yesterday’s unprecedented oil price movement signifies just how financial markets are trying to feel their way through this crisis whilst effectively blindfolded by the dearth of information available to them. Truly decentralised cryptocurrencies, on the other hand, do not suffer from the same information handicaps. All of the information is on-ledger, available for anyone to scrutinise at any time.

Whilst the fortunes of cryptocurrency (in particular BTC) and oil have diverged over the course of the last few weeks, there does appear to be some correlation between the crypto markets and the wider financial markets. Many people and funds have, in fact, diversified investment portfolios to give them some exposure to cryptocurrency markets. In the third quarter of 2019, the Grayscale Bitcoin Trust (which tracks the price of the cryptocurrency) was the fifth-largest holding among millennial investors in Charles Schwab’s self-directed brokerage accounts. When a financial crunch materialises with the speed and scale precipitated by the Covid-19 pandemic, there is a general flight to liquidity by some elements in the market, including crypto funds looking to repay investors seeking redemptions. Individuals that invest in crypto are no different to individuals that invest in financial markets; they are subject to the same economic forces such as a possible loss in income or unemployment at times like this. A general correlation is to be expected.

There are many aspects of blockchain technology today that are not perfect, trustless interactions between intermediaries represent a significant technological and scientific breakthrough which will continue to garner attention (positive and negative) and investment. If blockchain is here to stay then, it would seem, so too are cryptocurrencies.

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