The coronavirus outbreak at the beginning of 2020 has created a worldwide ripple effect and completely altered many financial predictions. For the first time since 2008 and the much talked-of Wall Street financial crisis, investors worldwide sought to insulate themselves from predictably failing economies amidst the lockdown.
While investors turned to traditional assets like gold and oil as a safe haven for their investment, bitcoin (BTC) became a popular hedging conversation clinching new all-time highs, in the last quarter of 2020.
Digitization and the rise of the “digital oil”
As health researchers seek to end this pandemic and restore some sense of normalcy worldwide, there is one thing we now know for sure — digitization is inevitable at every level. Global lockdown restrictions have seen a good number of digital assets, online workplaces, payment merchants, and online stores thrive tremendously.
Unsurprisingly, this trend sparked a fresh buzz in finance, with many investors looking beyond the traditional safe-haven assets — gold and oil — to digital assets. Now, more than ever, bitcoin and other cryptocurrencies have seen a large inflow of institutional investors.
Calling bitcoin “digital gold” and emphasizing it as a store of value is common in this cycle, compared to the 2017 bull run. But will there ever be any reason to call it “digital oil?”
The “digital oil” versus crude oil in 2020
After suffering significant losses in value in the second week of March 2020, bitcoin bounced back up to become one of the year’s best-performing assets. On the other hand, lockdown restrictions and automobile confinements resulted in a big blow on crude oil demand.
In April 2020, Brent prices fell to an average of $18 per barrel, the lowest monthly average since February 1999. Overall, bitcoin ended last year with a 318% increase in price, and WTI oil ended with a 22% loss in price.
One may say that oil is probably the top commodity when it comes to the real economy, while bitcoin seems very disconnected. When asked whether there is any way to compare them as assets, CFA charterholder Thomas Kuhn told BeInCrypto:
“The virtues of bitcoin playing a role like that of oil do lie in its use as this foundational asset, where it is essentially required for entry into the digital asset industry. It provides liquidity, and is the base layer of value on which everything else is related to.”
While gold enjoyed a good year, reaching the elusive $2,000 mark and clinching new all-time highs, the year-round performance of oil was relatively unimpressive, especially in a time where investors were looking to hedge against failing economies.
What does 2021 hold for both assets?
Uncertainties amidst the global pandemic have taken a toll on various economies — last year ended with the US dollar falling to its worst in three years. Predictably, global economies and fiat currencies will become weaker in the long run as they’ve been on a poor trend for a while.
As we head into the year, investors will likely continue to protect their money; one important conversation year-round would be the traditional safe haven class like crude oil or the “digital oil.”
On the one hand, oil is gradually recovering from a year-long dip and may well be on a path to full-blown demands worldwide. Long term believers would argue that crude oil never fails; it has an intrinsic value fueled by worldwide demand.
However, in dramatic events that saw Tesla stocks rise 695% to become one of the most valuable companies globally, it has become glaring that electric cars’ future is tremendously bright. Sooner or later, oil demand will be back down, and recovery may be a fairy tale.
For cryptocurrencies, the 2020 post-halving bull run has been very much likened to 2017. However, unlike 2017, bitcoin and other cryptocurrencies have enjoyed a healthier reception from institutional investors and hedge fund managers; mainstream media and public trust have also gone up significantly in the past few months.
Some still put up questions like the intrinsic value of crypto coins and extreme volatility to downplay the asset. However, bitcoin has every momentum to outperform every asset as it did in the past decade.
“A strategic reserve of oil provides price stability, as well as placing it as a geo-political asset, rather than a ‘normal’ commodity. At the strategic level of the economy, oil is a lot like money,” Kuhn commented and added:
“Bitcoin as a kind of ‘digital oil’ for the new financial system is not unreasonable. From within the context of digital assets, considering ethereum (ETH) and tokens of similar platforms is a closer comparison — they grease the wheels of decentralized mechanisms rather than bitcoin which acts like more of a foundation of firstly philosophy of the entire industry, and secondly of stored value — I consider it more foundational.”
However, when it comes to the perspective of traditional portfolio management, outside of digital assets, it is a much stronger comparison, according to Kuhn. He said:
“As bitcoin is to digital assets, oil is to industrial assets. The markets themselves are also similar — both oil and bitcoin trade like very similar assets.”
Issues to address
Oil is very sensitive geopolitically and macroeconomically. In 2020, we saw bitcoin take the first price hit due to the broader economy due to COVID-19. Speaking about whether bitcoin and oil will converge toward each other, or it will only be a matter of both reacting to the broader market, Kuhn stipulated that the following issues should be addressed:
- When will the risk-on appetite change to risk-off?
- How well do oil and bitcoin store their value?
- Are oil and bitcoin great money alternatives while the market has risk appetite, or will they become a kind of false hedge when risk is eventually sold?
- Will their price gains hold on a relative basis?
Kuhn believes that the industry might see these questions answered in Q2 or Q3 of 2021. “My view is that a basket of assets with monetary value should be considered with its weightings dependent on the conditions. So we might consider bitcoin and oil while underweighting gold until Q2 or where/if signs of risk emerge in markets,” he said and added:
“And finally on the question of risk, it looks like the major potential for risk being taken out of portfolios is the potential that central banks — especially the Federal Reserve — have lost control of their interventions in markets. Otherwise, they might continue providing liquidity to markets and supporting risk/asset prices until the end of time.”
Certainly, there are several projections to look forward to with every asset, positives or negatives. While the increasing digitization and the unfortunate coronavirus pandemic may have given cryptocurrencies some edge last year, it remains to be seen where both certainties and uncertainties will push crypto and oil this year.