Is there correlation between Bitcoin and oil?
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The oil production volumes of OPEC countries are changing every week, and the fluctuations in these volumes affect the entire commodity. Join Oil Profit now and make the best utilization of artificial intelligence and perfect trading strategies to help newbie traders in their trading journey. Unfortunately, the supply of geopolitical uncertainty is also above average, which does not make it any easier for traders to keep up with their portfolios.
The below-listed portion will address some of the correlations between Bitcoin and oil, why these correlations are important, how these correlations have changed in recent years and the implications associated with these changes on a macroeconomic scale.
Market Supply and Demand Analysis
Pre-1980s, oil was priced and sold by the barrel. Today, it is priced per barrel but traded in units of millions of barrels. Oil prices are determined based on market supply and demand as well as political events occurring across the globe.
NASDAQ published that the daily trading volume for bitcoin was around $450 million in early June 2017. On 20 July, the volume had dropped to $7.5 million per day. As media reports spread on Bitcoin’s growth, the price of bitcoin soared in March 2017 – nearly reaching $20,000 per coin at some point.
By June 2017, daily trading volume had dropped to around $200 million; trading activity has dwindled since then. The market supply and demand significantly impact bitcoin prices regarding oil prices. The two are correlated to varying degrees, and their impacts impact each other on a macroeconomic scale.
The Impact of Traditional Markets on Cryptocurrencies
Oil prices are often referred to as the benchmark for oil-producing nations – such as those in the OPEC. Any fluctuations or changes in oil prices drastically affect many other commodity markets, including energy and energy products.
If oil prices are high, consumers will be looking for another alternative source to save money. Bitcoin had dropped in value during the first few months but recently jumped back again, following similar movements with other cryptocurrencies and traditional commodities.
The majority of cryptocurrencies are still running on the proof-of-work consensus algorithm. This protocol is often referred to as a lottery system, which requires the node for transactions to solve a problem that is difficult to solve but easy to verify. The node that solves the problem is rewarded with some coins for their efforts, which will help keep things moving along.
If energy prices are high and traditional currencies remain stable, consumers may be more inclined to start using bitcoin as a substitute for existing markets. Conversely, if energy prices are low and traditional currencies become unstable, people may not bother using alternative assets such as bitcoin at all. It means that volatility in the mainstream markets can affect the price of bitcoin and vice versa.
The Emerging Markets Adoption
While China is still a primary producer and consumer of oil, its economy has slowed down. Additionally, their currency value is also declining. It affects the overall worldwide demand for oil as well as other commodities. It means non-traditional use cases such as cryptocurrencies are impacted because consumers now have to look for cheaper alternatives to help preserve their wealth and stay in touch with current commodities prices.
Both Oil and Bitcoin are a commodity in the US:
The Commodities Futures Trade Commission (CFTC) includes both bitcoin and oil in the same commodity category, which means that bitcoin can be used as a substitute for crude. As a result, it impacts its value and the price of related commodities such as natural gas and gasoline.
The Currency Effect on Cryptocurrencies
Many people have referred to oil as a commodity because it is easier to trade than gold or silver. In addition, it is easier to carry with you than gold bars or coins like silver coins are often used for smaller purchases. It significantly impacts bitcoin as it is easier to store and conceal than gold bars.
Oil is traded in units of barrels, while bitcoin is traded in units of coins and also virtually. It means that purchasing oil may involve more steps than buying bitcoins. It can also affect consumers because they must purchase contracts for net-long positions or contracts for difference (CFDs) for trading both commodities.
