In 2020, both digital and physical worlds are of great importance. Given the current situation, both of the worlds are affected in one way or another. While oil is termed as ‘liquid gold’ in the physical world, the gold of the digital world is ‘bitcoin’ and with no doubt, there is a reason as to which they are termed so. Both the latter and former have a lot in common. While the liquid gold was already seeing a downward curve in its industry, the outbreak of COVID-19 has only made things worse. On the other hand, along with many other industries and businesses the outbreak has also affected Bitcoin.
There are many reasons why the two go hand in hand. From the tendency to change any moment to losing value to having a value that can be claimed to be true even when it’s not, both oil and bitcoin have an economic boundary and similar characteristics to each other as well to gold. Somehow, however, bitcoin has managed to stabilise while the oil industry is still facing difficulties. What could be the reason? What does liquid gold lack?
The Liquid Gold Drops Bad !
As mentioned above, the oil industry saw a drop even before the outbreak took place and a number of reasons are responsible for that but the three main reasons are tough competition, fall in demand and war of prices.
With the increase in expansion of industry for mining and processing oil shales in the U.S, the already existing oil wells in the Saudis have a tough competitor and that has led to being oil being obtained at a larger scale
Even though the supply was more than sufficient, the demand for oil was falling even before the outbreak. However, after the outbreak due to the quarantine globally and restrictions on travel, things just got worse.
US regulatories have set good feildings for the fufutre of Breakdown.
Oil was priced well in a healthy manner both by Russia as well as Saudi Arabia but due to the fall seen at the beginning of March oil started to lose 30% in a day and it has continued falling ever since. The falling of prices for oil has aged the industry overall. Gregory Brew, an energy expert said that if Saudi Arabia wishes to, they can rapidly increase their production and supply the market at a faster rate which no other producers can match.
On the other hand, the U.S Department of Energy has started to buy oil at a lower price for it’s Strategic Petroleum Reserve. Physically, it had only been able to add 2 million barrels a day and is said to be reaching its capacity soon in less than 4 months. While there is a fall in the price of oil, Texas has decided to temporarily stop the production until favourable conditions are seen as it is not very practical to sell the product at a loss. Brent is being traded for $27, which is more compared to the U.S benchmark I.e West Texas Intermediate oil which is being traded under $20.
In a statement, Paul Sankey the director of Mizuho Securities told Fox Business ”Oil prices can go negative.”According to his statement, it can be said that the cost of extracting and storing oil can soon be more compared to its market price.
Bitcoin is going in and out the trade suits
While all of that is happening in the oil industry, there is a similar scenario that is being observed with bitcoin where the cost of mining a coin is exceeding its market cost.
In such cases, neither bitcoin or oil suffer from a “death spiral,” however, because there are always entities who can continue to extract it profitably, ensuring a constant supply is maintained.
Estimated consumption of oil by the world is 100 million barrels per day while the storage limit is 1.5 billion barrels. Given the circumstances, if there is no change in the demand but if the resources are stocked, the only choice left would be to stop production in places where the operation is less.
The question here is why are bitcoin and oil being called similar? How is the COVID-19 outbreak affecting them?
Even though both of them have the ability to move the market, after being stable for a long period, bitcoin and oil both have been hit hard in 2020. Last week there was a diverge in both, however bitcoin has managed to stabilize while the oil industry’s curve is still seen to be downward.
Availability: Bitcoin is reserved while oil is received abundantly. As time passes by, both resources will be used. On one hand, the bitcoin can be reused I.e bought and sold in the market, making sure that everyone who wants it can have it but on the other hand only a certain percentage of all oil can be recycled, resulting in extraction that causes surplus resources but less demand. Saudi Arabia and Russia have plenty of oil and can reduce prices for as long as they like, to avoid the war of prices.
Location: Oil is available and can be extracted from the Middle East, Russia, the North Sea, North and South America which are said to be the hotspots of oil globally. On the other hand, there is no specific region for the extraction of Bitcoin. Even though it has hotspots like China, Iran, North America, Scandinavia, it can be mined anywhere without boundaries. As compared to oil, bitcoin is less affected by factors like geo-political conflicts, cartels, price wars etc
Storage: Bitcoin miners can store coins in the hope of selling them at a higher price in the future and oil producers can do so by stocking them in piles. The difficulty is that oil requires vast warehouses and tanks to store, whereas all of the bitcoin that ever exists can be stored on an SD card which equals to size of a thumbnail. The only pipeline bitcoin needs to flow is the data pipes of the internet.
Bitcoin in exchange for oil?
Here comes the real deal. What if the two separate entities come together as partners?
Will the trade be ultimate?Even though the two are two separate totally different domains, can they come together as partners with bitcoin being used as a settlement for oil?
The questions may lead to a solution which might not be as effective and easy as it is thought to be.
In Southern America, Venezuela attempted to change from trading oil in terms of dollars and instead launched a Petro digital currency keeping in mind to avoid dominance from the U.S.
However, the attempt to standardise metro currency has failed while on the other hand, bitcoin is still a favorable option for countries that want to avoid trading that includes USD.
Director of digital asset strategies at VanEck, Gabor Gurbavks, believes that any country deeply invested in energy should be looking closely at bitcoin.
He stated that, “While for now the petrodollar system remains dominant and the U.S. dollar is ahead than other currencies, many nations are increasingly searching for alternatives,” considering that because “bitcoin is a relatively young asset … it’s not a full-fledged store of value yet.”
Bitcoin is all set to substitute petrodollar. In the meantime, it remains a safer commodity than oil.