Bitcoin Slump Coincides with Equity Market Crash

As mentioned in a previous article, Bitcoin will remain weak at least through the end of the month, due to weaker-than-expected liquidity and the Mt. Gox concern. 

The US equity market crashed initially after the outbreak of coronavirus all over the world, (one estimate by Dr. Brian Monahan, the attending physician of Congress and the US Supreme Court, was from 70 million to 150 million people in the US to become infected, which frightens the market), and further deteriorated after the price war of oil giants.  Note that petrodollar accounts for around a trillion dollars, which is one of the major investors of US treasury bonds. Note also Saudi Arabia’s breakeven oil price for fiscal balance is between 70 and 80 USD, while Russia could sustain a fiscal balance even at the price of 40 USD. This means the price war will not seriously hurt Russia in the short run. It is also worth noticing that Saudi Arabia is not interested in a possible negotiation with Russia in the near term. The next potential negotiation might happen in two months. 

Why analyze the oil market? Petroleum producing countries normally invest their petrodollars elsewhere, not only in the fixed income market but also in equity markets, which means they will cash out their existing positions if they forecast their cashflow will diminish in the future. We have seen the same picture in the second half of 2015, when the Qatar Investment Authority was forced to sell lots of its positions, to name just one, Glencore. While the price of these assets falls, chain reactions will be triggered in financial markets, which further damages liquidity.  

US shale oil players will also get hurt as only one-third of them have their total production costs under 40 USD. 

If the oil price remains below 40 USD for an extended period, shale players’ credit risks will significantly rise, which will trigger further chain reactions, such as bad loans for banks.  Shale oil players represent around 13% in the US high yield index. 

Under such circumstances, it is not surprising that bitcoin could be sold down by someone in urgent need of liquidity, which is followed by a bunch of momentum algorithm traders. Even gold is sold, let alone the digital gold. 

This article is part of our ongoing Crypto Insight series.

Check out our previous article here.