One lesson of this week’s oil-price crash is that markets aren’t acting very efficiently during the coronavirus crisis.
On Monday, the benchmark U.S. oil futures contract for May delivery tumbled to an unprecedented negative price, largely because storage tanks are full of a product few can use. How that surprised experienced oil traders might seem a mystery, since energy companies and Texas state officials had been warning for weeks that storage capacity was running out.
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Commentators quickly pointed out that the price anomaly was limited to the May contract; the futures contract for June delivery, after all, was still trading above $20 a barrel – a better reflection of oil’s true price. “Technical factors explain some of the decline,” the New York Times wrote. “Oil watchers don’t consider it the most accurate reflection of price action,” the Wall Street Journal wrote.
Then on Tuesday, that narrative proved fanciful when the June contract tumbled more than 43 percent to a 21-year low of $11.57 a barrel. The May contract settled at $10.01.
The only news was the price discovery: It turns out oil is worth a lot less now than it was at the start of the week, or in early April when it traded closer to $30 a barrel.
The takeaway for Bitcoin traders is that there might be a lot of factors in cryptocurrency markets that are known, but not really reflected in the price.
Those could include the deflationary impact of the coronavirus-induced global recessionand the potential inflationary forces of the Federal Reserve’s trillions of dollars of emergency money injections. Another might be the upcoming miner-rewards halving, due to take place next month on the Bitcoin blockchain.
“The markets are just simply reflecting at this point what’s going on in the real economy, which obviously is a lot of volatility,” Commodity Futures Trading Commission Chair Heath Tarbert told CNBC on Tuesday, in an interview about the oil market.
The reality unfolds slowly, and the volatility happens all of a sudden.
This might help explain why Bitcoin has been stuck for all of April in a range between $6,400 and $7,400, even in the midst of what looks to be the world’s biggest health emergency and economic crisis so far this century.
“Bitcoin barely flinched as negative oil prices sent shockwaves through traditional markets and in relative terms has held up very well,” the Israeli trading platform eToro noted Tuesday in an email to clients.
Was that the right reaction for the Bitcoin market?
There’s so much that traders don’t know about the future course of the pandemic, and of its ramifications for business, society and culture. But it’s not even clear if markets have properly priced in what traders already know.
Bitcoin is often touted by traders as a hedge against inflation, and many cryptocurrency investors assume that the Fed’s money injections will eventually spur faster price rises. But Deutsche Bank has predicted in recent reports that the U.S. unemployment rate will rise to a post-World War II record of 17 percent, putting downward pressure on wages. That’s deflationary.
For Bitcoin traders, squaring the countervailing forces adds to the frustration of trying to divine what sort of speculation the Bitcoin market is already reflecting. Is May’s halving priced into the market, given that it was put on the schedule 11 years ago when the Bitcoin blockchain was launched? That debate’s been raging for months.
The oil-price collapse this week shows how bad markets can be at reflecting what’s already known until there’s a hard reality check on supply and demand.
That might mean Bitcoin traders won’t know the price impact of the cryptocurrency’s potential adoption as an inflation hedge until more mainstream investors actually start buying.
And it might mean that the market won’t see the full impact of May’s halving until it comes – and maybe goes.
TWEET OF THE DAY
BTC: Price: $6,960 (BPI) | 24-Hr High: $6,988 | 24-Hr Low: $6,783
Trend: Bitcoin is flashing green on Wednesday as price volatility falls to fresh 3.5-month lows.
The top cryptocurrency is currently trading near $6,950, representing a 1.4 percent gain on the day. The cryptocurrency is lacking a clear directional bias, however, as prices have spent a better part of the last 2.5-weeks trading in the narrow range of $6,450 to $7,450.
Due to the range-bound activity, the spread between Bitcoin’s Bollinger bands – volatility indicators placed two standard deviations above and below the 20-day moving price average – has narrowed to $838,…