Stock Groups

Just How Intertwined Are They? By DailyCoin


Evergrande and Crypto: Just How Intertwined Are They?
  • After reports that Evergrande might go bankrupt due to its $300 billion debt, the crypto market recovered.
  • Market domino effects could affect Tether, which is the most stablecoin in terms of market capitalization.
  • Institutional investors are looking to convert their investments into liquid cash to avoid crypto’s volatility.

Just when you thought another Chinese economic hysteria couldn’t unfold, it just did.

Unfortunately, crypto markets are not immune to economic uncertainty, and Bitcoin’s volatility is linked to the global news cycle. Of course and other cryptocurrencies can thrive when market uncertainty is high, but when crypto-assets become collateral damage in a money-hungry conflict, all markets take a hit.

On the Macro Level

Evergrande, China’s second-largest real estate developer, has amassed a debt of $300 billion, or the equivalent of 2% of China’s GDP, which according to reports, it is unable to pay. Another Lehman Brothers event that will catalyze the global economy’s growth has begun after Evergrande was informed by the Chinese government it could not pay its September 20th due interest payments.

Evergrande’s story is expected to end in a dark future according to investors. It will likely be the largest corporate collapse of all time if the company is forced to close its doors. CNN reports that Evergrande’s stock dropped by 85% between 2021 and 2021. The company hopes for a bailout from Beijing. However, what does all this have to say about the cryptocurrency market’s current condition?

Crypto Is on the Edge

The crypto market took a hit after economic turmoil surrounding Evergrande intensified. Bitcoin briefly dipped below $40,000, reaching a new 45-day low, increasing the market skepticism of Bitcoin’s market value being contrary to that of the global financial system.

In a September 9th briefing note, Mark Williams, chief Asia analyst at Capital Economics, noted that an Evergrande collapse could be “the biggest test” China’s financial system has faced. Moreover, traders and analysts have agreed on one thing: Evergrande going bankrupt will affect international markets because they owe “money to around 171 domestic banks and 121 other financial firms.”

Adding to that, Asian institutional investors have higher exposure to digital assets. Fidelity Investments’ survey found that 71% Asian institutional investor allocate a part of their portfolios to crypto-assets. Companies partnering with Evergrande may have to sell their shares if the Hong Kong Stock Exchange drops. Moreover, in a Barron’s article, Daren Fonda wrote that the market response is mainly due to “investors going to cash.”

On The Flipside

  • Nayib Bukele, president of El Salvador, “bought the dip,” adding 150 Bitcoins to the country’s reserve.
  • Evergrande revealed growing issues that the Chinese government ignored.
  • The dismissal of stablecoin pairing could limit institutional investors’ interest in cryptocurrencies.

Tether Can Break the Crypto Market

Tether, the largest stablecoin by market capitalization, is a Hong Kong-based cryptocurrency. The company is vulnerable to being used as collateral during the economic war by operating in the same financial environment as Evergrande. Tether was brought to the forefront after Evergrande, Chinese and Evergrande commercial paper (CP) or CD certificates were discovered. These documents are used as backing for their USDT.

Tether has stated it no longer holds any commercial paper. David Morris however notes that Tether may still have exposures to Chinese obligations, or other types of investments related to the Chinese government. What’s more, Tether said that they cannot disclose counterparty information because they “are in a commercially sensitive business.”

CNBC’s Jim Cramer said that “If Tether collapsed, well, then it’s going to gut the whole crypto ecosystem,” citing that Tether has to use certain assets, which could be Chinese assets including real estate, to peg its USDT token. Although crypto isn’t directly linked to Evergrande, investors can use the event as collateral in the case of a financial collapse.

Why you Should Care

Bitcoin was once seen as an inflation hedge and an asset that doesn’t follow financial rules. But what if the Evergrande financial error affects the crypto market? Bitcoin would lose its status as a financial instrument in this scenario.


Join to get the flipside of crypto

Upgrade your inbox and get our DailyCoin editors’ picks 1x a week delivered straight to your inbox.

With just one click, you can unsubscribe at any time.

Continue reading on DailyCoin