Global finance and networks of long-term contracts link oil suppliers, buyers, traders, and consumers. The industry is committed to a system in which crude oil prices are made public to allow buyers and sellers to trade fairly. If you are interested, you must know How Bitcoin Works.
However, technological evolution has led us into a period where global financial markets have developed digital networks that make it possible for more people than ever to invest in what had been out of reach only for the wealthiest few.
The below-mentioned portion discusses why cryptocurrencies such as Bitcoin may be better suited for trading oil than fiat currencies. It will also explore how digital assets can be applied and used to manage risk within the oil trading industry better and mitigate challenges faced in current-day crude trading.
Oil Trading, Modern Currency and Cryptocurrency Volatility
As crude oil prices continue to rise weekly, trading volumes have climbed accordingly. It is increasingly evident that technology is allowing more people than ever to be able to trade crude oil. For example, the Quandl API data shows that over 35 million trades were executed in 2021 and over 87 million in 2022. This tremendous growth leading into 2022 shows how cryptocurrency has been integrated into many more aspects of life and is advancing daily as a global currency.
Companies will also use cryptocurrency to mitigate some of the challenges faced in oil trading. For example, because cryptocurrencies are a global currency, oil traders can mitigate risks by trading them on exchanges in real-time. In addition, banking institutions providing lines of credit and support for this type of trade could avoid risks associated with future events such as a recession or natural disaster.
To truly understand how cryptocurrency is better suited for trading oil than fiat currencies, it is essential to understand the differences between both and how they are used in oil trading. A significant difference between these two types of currency is that digital assets like Bitcoin contain no central government or bank that can create more.
Problems with the oil trading industry
The magnitude of natural disasters around the globe continues to grow. In 2015, the United States was hit by dozens of tornadoes and hurricanes coinciding with a significant flood in the Midwest. It caused an influx of crude oil prices, leading to oil shortages and price spikes. By 2022, over 50% of crude in the world will be affected by natural disasters, including earthquakes, volcanoes and floods. An inability to track crude properly can lead to economic consequences for national and international economies.
For example, after the 2011 earthquake in Japan, which damaged the Fukushima nuclear power plant, crude oil prices jumped by over 50% within a short period. It caused a spike that led to shortages of crude and fracking-related natural gas costs. The consequences of being unable to track crude properly have been felt worldwide.
Using digital assets such as Bitcoin can help mitigate some of these problems without governments needing to reduce taxes or altering future regulations from oil trading industries. It is possible through a mechanism known as ELI5, which stands for "Exchange Led Indexing.
Companies Can use digital Assets to mitigate the Problems of Oil Trading
The current oil trading system is based on benchmarks used to help determine a set price for crude oil. Price reporting agencies, including Platts and Argus Media, disseminate this price to the world. Both agencies use proprietary systems made up of reports, news and statistical data to decide the crude benchmark price.
However, these agencies do not trade in physical oil but in financial futures related to crude futures contracts located in NYMEX and other exchanges globally that trade with digital assets such as Bitcoin. These agencies have contracts with consumers, producers and other sellers to help provide pricing transparency and a mechanism for various parties to agree on a fair price for crude at any given time.
A significant problem with this system is that the benchmark price is based on estimating the future price of crude oil. There are also increasing concerns over rampant market manipulation and collusion among oil trading exchanges bundled with banking institutions.
This market manipulation caused energy prices to jump by over 80% during this period and led energy companies to lose billions of dollars in revenue. However, bitcoin, a cryptocurrency, has no central government or agency that can arbitrarily change the system to benefit the few and not the many. Therefore, countries worldwide that trade oil can use a more transparent method of pricing crude using digital assets like Bitcoin.
Mechanics behind ELI5
Users can use Bitcoin to provide transparency and efficiency to the oil trading industry using ELI5 protocols on the Bitcoin blockchain. This type of protocol helps create a futures contract that exists on a blockchain and allows traders, producers, consumers and other interested parties to agree on a fair price for crude oil. In addition, using intelligent contracts within these protocols will help enable more trust between parties by providing transparency and an immutable record of transactions.