GM. This is Milk Road, the newsletter that’s trying something new: focused macro editions from our mNoP (macro-Nerd-on-Payroll), Tomas!
Each Thursday, we’re going to take a look at the global crypto market through a macro lens - so you can get a deeper understanding of the broader market mechanics affecting crypto.
Sound good? Great! Let’s get into it…
Here’s what we’ve got for you today:
- ✍️ How the price of oil is affecting crypto.
- 🎙️ The Milk Road Show: Matt Hougan: How Bitcoin Gets to $1 Million.
- 🍪 $650B was wiped from the U.S. stock market.
Alchemy is the blockchain infrastructure behind Robinhood, Polymarket, Stripe, and Coinbase Wallet. Get their free guide on banks & stablecoins here.
Prices as of 2:00 p.m. ET. Trade today with Milk Road Swap.
HOW THE LARGEST OIL SUPPLY DISRUPTION IN HISTORY IS AFFECTING CRYPTO 🛢️
As the Iran war continues, the price of oil is surging higher.
The Strait of Hormuz is blocked - meaning a large chunk of the world’s oil is currently choked off.
The International Energy Agency says “the war is creating the largest supply disruption in the history of the global oil market”.
So, what does this mean for risk assets like stocks and crypto?
Let’s take a look…
What does this mean for risk asset prices?
If we look back at previous major geopolitical events, the S&P 500 generally reacts predictably.
An initial drop, finding a bottom within days, and fully recovering within weeks.
This appears to be the playbook for risk assets like the S&P 500 and Bitcoin this time around, so far at least.
But this particular geopolitical event is really all about energy prices.
And crude oil prices remaining extremely elevated for a sustained period of time is no good for risk assets.
Since the start of the war - we’ve seen the S&P 500 and other risk assets move in almost perfect inverse lockstep with the oil price.
So, oil up = risk assets down.
And, oil down = risk assets up.
Oil is now the most important chart to watch.
So what’s going on with it?
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HOW THE LARGEST OIL SUPPLY DISRUPTION IN HISTORY IS AFFECTING CRYPTO (P2) 🛢️
I’ve written in detail about the oil price in today’s macro newsletter.
And the situation really boils down to this: when will the Strait of Hormuz be reopened?
The longer the Strait remains closed - the higher the risk of elevated oil prices.
It’s really that simple.
Former Head of Commodity Research at Goldman Sachs, Jeff Currie, thinks no effective policy response can halt or meaningfully reverse the upward trajectory of oil prices while the Strait of Hormuz remains disrupted/blocked.
Natasha Kaneva, Head of Global Commodities at JP Morgan, said:
“Policy measures may have limited impact on oil prices unless safe passage through the Strait of Hormuz is secured. Escorting every tanker would require many warships and close allied coordination, but the U.S. Navy has limited vessels available due to ongoing operations.”
An elevated oil price is a big problem - because it essentially acts like a tax on the global economy.
I’ve looked at several expert opinions on what different oil prices (if sustained) would mean for the global economy.
And here’s your handy cheatsheet showing the consensus views…
We’re currently in the “headwind zone”.
If oil prices continue to rise further and remain elevated in the “stagflation zone” or even higher, risk asset prices will likely continue to come under pressure.
If oil prices can fall back below $80, the pressure on risk assets will likely disappear.
The worst-case scenario - the “panic tipping point”
In the worst-case scenario, the Strait remains closed for a long period of time and oil prices continue to rise.
But there is an important clue to watch regarding how the market is treating the situation.
Right now, the market sees the oil price move as inflationary (not ideal - but not catastrophic, and could be repaired relatively quickly).
But there may come a “tipping point” where increasingly elevated oil prices shift the main concern from inflation to “growth/recession shock”.
The key here is watching the price of oil in tandem with U.S. Treasury yields.
Right now, oil is moving up, and Treasury yields are also moving up.
This indicates the market is more concerned about inflationary pressures.
However, if at some point we see oil moving up, and Treasury yields moving down, this could be the “panic tipping point”.
This would likely mean the main fear has shifted from inflation to growth/recession risk (a much worse scenario for risk assets).
The best-case scenario - reopen the damn Strait
The best-case scenario is that the Strait is conclusively reopened quickly.
This would likely significantly dampen fears of elevated oil prices.
And would likely alleviate pressure on risk assets.
In this scenario, risk assets could see a relatively strong “peace dividend” bounce higher.
But right now, speculators on Polymarket aren’t confident of a swift reopening…
Wrapping up
What happens next?
I don’t know. No one does.
What I do know is that the Strait of Hormuz and the oil price are probably the most important things to watch.
And a prolonged Strait blockage is probably not good news…
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