Analysis on the impact of crude oil and U.S. debt on Bitcoin prices
By: Bruss Wayne
Tags: Btc, Trade, Oil, Investment

Analysis on the impact of crude oil and U.S. debt on Bitcoin prices

Bitcoin priced in U.S. dollars may be more subject to the borrowing cost of U.S. dollars, but foreign exchange arbitrage and asset tax avoidance will all have a positive impact on Bitcoin.

The author of this article is the strategist Barry in New Bloc, Barry has 5 years of foreign exchange and gold market trading experience.

Event summary

Event 1: On December 20, 2020, Iraq announced that its currency would depreciate approximately 20% against the U.S. dollar, setting the largest currency depreciation in history. The Iraqi government, which lacks financial resources, is facing an economic crisis caused by low crude oil prices. The central bank is taking measures to avoid depleting foreign exchange reserves, and the government is also seeking to reach a long-term crude oil supply contract in the form of advance payment transactions. According to reports, in December 2020, Iraq’s crude oil exports increased significantly, possibly exceeding the country’s OPEC quota (POEC refers to the Organization of Petroleum Exporting Countries, or “OPEC”).

Event 2: Saudi Arabia unexpectedly announced that it would voluntarily and unilaterally reduce oil production by 1 million barrels per day in February and March 2021. Russia and Kazakhstan were allowed to increase production in February under the OPEC+ agreement, while other OPEC+ member states Maintain the January output unchanged.

Event 3: U.S. Democratic Senator Warnock won the election for the Georgia State Senate, which means that the Democratic Party will actually control the two houses and the era of big government officially begins.

Analysis and prediction

1. Analysis of Middle East Crude Oil

As Saudi Arabia’s fiat currency and the US dollar formed a fixed exchange rate system, after the oil war in March 2020, U.S. shale oil significantly squeezed out the crude oil market share, which eventually led to a substantial reduction in Saudi Arabia’s foreign exchange reserves. Russia was previously sanctioned by the United States. Choosing to de-dollarize, which led to a large increase in gold holdings by the Russian authorities.

During 2019–2020, as the price of gold rose sharply, Russia’s foreign exchange reserves also rose, as shown in the following chart:

In the crude oil market, the game between Saudi Arabia and Russia will easily be squeezed into their market share due to the shale oil revolution in the United States. However, the Russian exchange rate is not pegged to the US dollar, and it has increased its gold holdings significantly. , So its foreign exchange reserves rose instead of falling.

Therefore, the key to breaking the prisoner’s dilemma has been recognized by market investors. The experience of the “confidence threat” to Russia’s foreign exchange reserves and Saudi Arabia’s deep dilemma due to the petro-dollar system has allowed the current Saudi authorities to know that they only have to give up a portion of the market share. It is the most moderate solution.

Iraq, which is also pegged to the U.S. dollar, had to announce a 20% depreciation against the U.S. dollar in December 2020 in order to avoid depleting its foreign exchange reserves. The result was that Iraq’s crude oil exports increased significantly in December. It may even exceed the Iraqi quota required by OPEC.

At the OPEC meeting, we saw that Saudi Arabia took the initiative to unilaterally announce a reduction in crude oil production because of concerns about the impact of the epidemic on crude oil demand. Countries in the Middle East are basically facing the same predicament, and the reason why Saudi Arabia surrendered market share and reduced production is for OPEC internally, this game is a “smart pig game.”

If things go on like this, Saudi Arabia’s foreign exchange reserves will continue to decline due to the reduction in the crude oil market share and the weakening of the dollar. Iraq’s increase in crude oil production and exchange rate depreciation may be the road that Saudi Arabia will face in the future.

At present, due to Saudi Arabia’s position in the crude oil market, its production cuts have a great impact on crude oil prices. As oil prices climb, the increase in exports will ease its foreign exchange reserves. However, high oil prices are for Russia, whose exchange rate is not anchored to the dollar, and For the unrestricted United States, it is a great benefit. On the one hand, these countries can enjoy the benefits of high oil prices. On the other hand, increasing crude oil production can seize more market share, and oil prices will come under pressure from then on.

After such repeated cycles, Saudi Arabia’s share in the crude oil market will become less and less, and it will eventually lead to Saudi Arabia making new production reduction options in the future, it will be difficult to cause sharp fluctuations in crude oil market prices, resulting in continued decline in Saudi exports and foreign exchange reserves. , It will become more dangerous to Saudi Arabia, and the market control of crude oil will be further transferred. Also you can buy or sell your own Bitcoin in the #1 professional exchange Binance. Just click this link or register with the referral code MN5KXXBC, and you can earn up to 40% of the fees.

2. Analysis of the Democratic Party’s control of the two houses

U.S. Democratic Senator Warnock won the election for the Georgia State Senate recently. The Democratic Party will actually control both houses, which means that the era of big government is about to begin.

In an economic recession, market failures often occur in the real environment, so direct government control is more necessary. In the era of big government, the government can do more to drive the economy towards recovery, but it is also possible that the direct regulation of the government will make social contradictions more prominent and social problems more serious.

When the market predicts that the Democratic Party will unify the two houses, because market investors generally believe that the Democratic Party will have a larger fiscal stimulus plan and will issue more US debt, the supply of national debt is expected to increase as a result.

In the minutes of the December 2020 FOMC meeting on interest rates announced by the Fed on January 6, the Fed proposed the term “reduction” at the meeting. It can be seen that the Fed’s willingness to buy Treasury bonds is not strong, which means that even the Democratic Party The ruling Ministry of the Treasury wants to issue more U.S. Treasury bonds. As the Fed is less willing to buy, the number of investors holding U.S. Treasury bonds will be relatively reduced, thereby stimulating the increase in the 10-year U.S. Treasury yield. Join the #1 exchange Binance by clicking this link or submitting the referral code MN5KXXBC, and you will earn up to 40% commission of the fees.

At present, market investors have already anticipated this in advance, as shown in the figure below:

The rise in long-term Treasury yields means that the Fed’s attitude is changing, which also constitutes a new upside on the chart, and market liquidity will begin to ebb.

However, considering the size of U.S. Treasury bonds, the rise in U.S. Treasury yields means that the U.S. finances will need to pay more interest costs in the future. Now the U.S. Treasury yields have exceeded the investment bank’s forecasts of U.S. GDP in 2020, and will be even higher in the future. Interest expenditure will inevitably be accompanied by more bond issuance.

In the long run, the scale of U.S. Treasury bonds has begun to limit the yields of U.S. Treasury bonds. The reason why the U.S. attitude has changed now is that New Bloc analysts believe it may be due to the fact that the Democratic Party has unified the two houses and the Fed has partially restricted its fiscal scale. In order to avoid passively falling into the path of fiscal deficit monetization, we can also infer that the Fed will not tolerate the rapid rise of U.S. bond yields to a certain height, but in the short term, as the economy gradually recovers, the Fed’s attitude change may continue to promote U.S. Treasury yields rose.

3. Predictions on Bitcoin’s impact

Bitcoin denominated in U.S. dollars may be more subject to the borrowing cost of U.S. dollars. However, due to the characteristics of Bitcoin as an alternative cross-border payment method, investors may use Bitcoin for foreign exchange arbitrage through changes in short-term spreads . Large asset holders will also use Bitcoin as an intermediary for tax avoidance, etc. These actions will have a positive impact on Bitcoin.

At present, the price of Bitcoin is experiencing violent fluctuations, but it is still in a state of being continuously bought. If, as an investor, you want to allocate Bitcoin to achieve short-term expected returns, you need to pay attention to the recent increase in U.S. bond yields. It is possible that market liquidity will gradually diminish, because speculation costs become higher, which will deplete the upward momentum of Bitcoin, and will eventually stop speculative funds.

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