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New Bloc: An analysis of the impact of crude oil, US Treasuries on the price of Bitcoin

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As an investor, if you want to achieve short-term expected returns by allocating bitcoin, you need to pay attention to the possibility that the recent rise in US bond yields will gradually decrease market liquidity

Originally written by Barry Bloc

I. Event summary

Case 1:On December 20, 2020, Iraq announced its currency against the dollar by about 20%, its biggest currency depreciations would have been, because of lack of financial resources of the Iraqi government, facing economic crisis caused by crude oil prices are low, the central bank is taking steps to avoid running out of foreign exchange reserves, the government is also seeking to advance in the near future, the supply of crude oil to achieve a long-term contract. In December 2020, Iraqi crude oil exports were reported to have increased significantly, possibly exceeding the country's OPEC quota (POEC).

Case 2:Saudi Arabia unexpectedly announced that it would voluntarily and unilaterally cut oil production by 1 million b/d in February and March 2021. Russia and Kazakhstan were allowed to increase production in February under the OPEC + agreement, while other OPEC + members kept their output unchanged in January.

Case 3:Democratic U.S. Senator Paul Warnock won the Georgia Senate election, giving his party de facto control of both chambers and ushering in the era of big government.

Second, analysis and prediction

1. Middle East crude oil analysis

As legal tender in Saudi Arabia form a fixed exchange rate with the dollar, after the March 2020 oil after the war, the American sharp shale oil from oil market share, eventually lead to Saudi Arabia's foreign exchange reserves greatly reduced, while Russia because of sanctions by the United States before, but chose to dollarization, resulting in the Russian authorities more gold.

During the period of 2019-2020, as the price of gold rose sharply, so did Russia's foreign exchange reserves, as shown in the chart below:

In the oil market, Saudi Arabia and Russia could easily lose market share to America's shale oil revolution, but Russia, which is not pegged to the dollar, has significantly increased its holdings of gold. As gold prices have risen, its foreign exchange reserves have risen.

Therefore, the key to breaking the prisoner's dilemma has been recognized by market investors. The experience of the "credible threat" of Russia's foreign exchange reserves, and Saudi Arabia's predicament in the petrodollar system, have shown the Saudi authorities that the most modest solution is to cede some market share.

Iraq, which also pegs its currency to the dollar, had to announce a 20% devaluation against the dollar in December 2020 to avoid running out of foreign exchange reserves. As a result, Iraq's crude oil exports increased significantly in December, possibly exceeding Iraq's Opec quota.

At the OPEC meeting, we saw Saudi Arabia take the initiative to unilaterally announce a production cut because of concerns about the impact of the outbreak on oil demand. Countries in the Middle East are basically facing the same dilemma, and Saudi Arabia's decision to cede market share and cut production is a game of wisdom within Opec.

Over time, Saudi Arabia's reserves will continue to fall as its share of the oil market declines, combined with the impact of a weaker dollar. Iraq's oil production and exchange rate depreciation may be the road that Saudi Arabia faces in the future.

At present, due to Saudi Arabia in the crude oil market position, its production had a great influence on the price of crude oil, and with oil prices rising, its exports increase would ease its foreign exchange reserves, but high oil prices is not anchored on the currency of dollars in Russia, and not restricted in the United States, is very big, on the one hand, these countries can enjoy the benefits of high oil prices, on the other hand, increase production of crude oil can grab more market share, the oil price from now on will be under pressure.

Repeat several times, Saudi Arabia's share of the crude oil market will be less and less, eventually lead to future Saudi make new production when the choice, it is also hard to cause volatility to the market price of crude oil, thus decreasing Saudi exports and foreign exchange reserves, will become increasingly dangerous to Saudi also, control oil market will be further shift.

2. Analysis of Democratic Control of Both Houses

In the United States, Democratic Senator Paul Warnock recently won the Georgia Senate election, giving his party effective control of both chambers and heralding the dawn of an era of big government.

In the economic recession, the real environment will often appear market failure, so the need for direct government regulation. In the era of big government, the government can do more to drive the economy to recovery, but it may also make social contradictions more prominent and social problems more serious due to the direct regulation of the government.

When the Democrats are expected to take control of both houses of Congress, the supply of Treasury bonds is expected to increase as investors generally expect a bigger fiscal stimulus package and more Treasury issuance.

On January 6, the federal reserve announced in December 2020, the FOMC policy policy-setting meeting, the fed put forward at the meeting the word "cut", it can be seen that the fed's purchases will is not strong, this means that even if the democratic administration of the Ministry of Finance to issue more U.S. debt, thanks to the fed's purchase intention, lead to hold U.S. debt investors will be relatively reduced, thus stimulating the 10-year us Treasury yields to rise.

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

The rise in long-term Treasury yields, indicating a shift in the Fed's attitude, constitutes a new upside on the chart, and market liquidity will begin to ebb.

However, considering the scale of US debt, the rise of US Treasury bond yield means that the US finance will have to pay more interest cost in the future. Now the US Treasury bond yield has exceeded the investment bank's forecast of US GDP in 2020. Higher interest expenditure in the future will inevitably be accompanied by more debt issuance.

Government debt in the long run, the United States began to restrict the Treasury yields, is now the American attitude change, New Bloc analysts believe may be due to the democratic united after both houses, the federal reserve to certain limits on the size of its fiscal, in order to avoid passive into deficit monetization way, so we can infer that the fed would not tolerate Treasury yields rise too rapidly to a certain height, but in the short term, along with the economic recovery, the fed's attitudes are likely to continue to push Treasury yields higher.

3. Predictions of Bitcoin's Impact

Currency denominated in dollars, may be more under the control of the borrowing costs of $, but due to the nature of the currency cross-border payment method can be used as an alternative, so there would be investors through short-term spreads change, using the currency for foreign exchange arbitrage, large asset holders at the same time, also use COINS as an intermediary for tax evasion, and so on, these behaviors will have positive impact on the currency.

At present, the currency prices are volatile, but it is still in a state of being positive continue to buy, if as an investor, to configure the currency, achieve the expected short-term gains, need to pay attention to the recent Treasury yields higher, with the possibility of decreased gradually let the market liquidity, because the speculative cost high, will loss the kinetic energy of the currency rises, will eventually make speculative funds hope and stopped.