Oil prices
Inflation
Federal Reserve
Cryptocurrency
This is not a straight line.
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PrimeXBT Senior Market Analyst Jonatan Randin.
Cryptocurrency traders usually don't pay much attention to the shipping of oil tankers in the Persian Gulf. However, this year, disruptions in the Strait of Hormuz have become an important factor in understanding the trend of Bitcoin prices, even on days when there isn't much news related to cryptocurrencies.
This connection is not as distant as it may seem. Rising oil prices will feed into inflation, affecting the Federal Reserve's interest rate decisions, and ultimately impacting the liquidity available for risk assets such as Bitcoin. Understanding this chain of events helps to explain some of the recent fluctuations in the crypto market, as well as the possible driving factors for the next phase.
Oil prices
The Strait of Hormuz typically carries about one-fifth of the world's oil shipments. Since the conflict involving the United States and Iran began at the end of February, shipping has been very limited. As of the week of October 13, oil flow was around 11.6 million barrels per day, whereas the normal level is about 17 million barrels per day.
Brent crude oil, which serves as a global oil price benchmark, was around $61 at the beginning of this year and rose to a high of around $118 at the end of March. It then fell back to around $70 during the summer ceasefire, but subsequently rebounded sharply as attacks on oil tankers continued. On October 16, its trading price was around $105.
Inflation
When oil prices rise significantly like this, it usually quickly affects consumers through fuel prices. In January, fuel prices in the United States were 7.5% lower than in the same period of the previous year, but by May they had increased by 40.5%. The overall inflation rate rose to 4.2%, the highest since April 2023.
When gasoline prices rise, overall inflation also increases within the same month. The decline in June occurred during the ceasefire period. Source: U.S. Bureau of Labor Statistics.
We have obtained the data for September, which was released on October 14th. The figures show that the inflation rate has risen back to 3.7%, with fuel prices increasing by 34.2% year-on-year, contributing more than half of the month's increase. If we look at core inflation, which excludes food and energy costs, it has risen from 2.4% to 2.6%.
The last figure is very important because it may indicate that energy costs are spreading to other prices in the economy.
Federal Reserve
The Federal Reserve, the central bank of the United States, raised interest rates to 3.75% to 4% in September. This was the first rate hike since 2023, and many people had originally expected another hike before the end of the year. After the release of the CPI report, the probability of a rate hike in October rose from about 22% to nearly 50% within a single day, before it fell back after the new Federal Reserve Chairman Kevin Warsh stated that he would not predict the outcome of the meetings.
Cryptocurrency
As is well known, Bitcoin does not pay interest. When interest rates rise, assets that offer interest or returns become more attractive. In such cases, the US dollar tends to strengthen, thereby drawing liquidity away from riskier assets like Bitcoin.
During the week from October 5th to 9th, there was a net outflow of approximately $681 million in US spot ETF, which is a significant amount. This represents the largest single-week withdrawal since June. Subsequently, on the morning following the release of the CPI report, Bitcoin fell below $81,000.
This is not a straight line.
Oil prices and Bitcoin do not move in opposite directions simply. The connection between them is mediated through inflation and the Federal Reserve. Source: Yahoo Finance, the October closing price of Brent crude oil is from a published oil market report.
If we plot oil prices and Bitcoin on the same graph, some interesting and important patterns become apparent. The two do not move in sync like mirrors; in other words, they are not completely correlated. Clearly, when oil prices fell to around $70 per barrel in June, Bitcoin also dropped below $60,000. This was because the Federal Reserve decided to keep interest rates unchanged, and interest rate cuts no longer seemed to be a focal point for policymakers.
Subsequently, at the end of August and in September, Bitcoin rose again, despite oil prices also increasing once more, and the Federal Reserve carried out interest rate hikes. The reason is that these interest rate hikes were within market expectations.
Therefore, what truly drives Bitcoin is not the oil price itself, but how the oil price affects inflation, and then how inflation affects the Federal Reserve. This is the chain we discussed earlier. If some kind of agreement is reached to reopen the Strait of Hormuz, it might ease this entire transmission chain; of course, further escalation would tighten that chain.
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