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Evergrande Crypto Crisis in China Hurts Crypto Market

Bitcoin price fell below $40K for the first time since August along with other cryptocurrencies. This drop appears to be contagion from the falling equity market, amidst fears that Chinese real estate giant Evergrande could slide into bankruptcy. 

Evergrande, at the time of writing, remained the world’s most indebted property developer. Earlier this week, the news of the extent of the company’s financial troubles ignited fears similar to the situation in 2008, when a major housing crisis led to a tumbling global market that degenerated into a severe recession.

Evergrande’s messy situation

At $300 billion, Evergrande’s debt profile represents 6% of the total debt of China’s overheated property sector. With this sector slowing down since this year, it has become difficult for Evergrande to meet up with its debt obligations, as payment to suppliers has become difficult.

According to reports, the company resorted to using alternative means to settle parts of their debts, like paying creditors with unfinished properties, since it is running out of funds. Such difficulties point towards the possibility of a default to investors, leading to fears that the company might slide into bankruptcy.

Complications continue, with protests taking place outside the company’s offices in China, while Chinese banks have stopped giving loans to customers for unfinished Evergrande properties, leading to increased panic over the safety of investments in such a huge industry, and the ripple effect that it could cause in the global equity market.

Investors are running to safety

The events of 2008 have remained fresh in the minds of many investors, coupled with the fact that China is the second-largest economy in the world. This justifies the fears of many investors who may be suspecting another major hit on the global markets. Most of them are opting for safety by selling off and offloading their risks ahead of possible danger.

As investors offloaded their risks and engaged in a sell-off, Bitcoin and other cryptocurrencies followed the trend. Bitcoin price fell from above $48K to around $42.5K within 24 hours. Other cryptocurrencies followed, with Ethereum dropping from above $34K to almost $29K during the same period. Cardano, Polkadot, Solana, and several other top altcoins also responded similarly.

The link between Evergrande and Bitcoin

For many Bitcoin proponents, this comes as a bit of surprise, since the asset has been praised as a safe-haven and an alternative to mainstream assets. The expectation would have been for the opposite to happen, that is, for investments flowing out of the mainstream equity markets to find their way into the Bitcoin and cryptocurrency market instead.

A recent report claims that this associated impact by the Evergrande situation on the cryptocurrency market could be connected with Tether’s exposure to the Chinese market. The report noted that there is the suspicion that Tether is heavily exposed to Chinese commercial paper. Therefore, since most cryptocurrency investors adopt Tether stablecoin as a buffer during market volatility, whatever happens in China would most likely have a direct impact on the cryptocurrency market.

Although the falling prices across both the mainstream and alternative markets have instilled fear among investors, analysts do not see the likelihood of a crash across economies.

Simon MacAdam, Capital Economics senior analyst said;

Even a messy collapse of Evergrande will have a little global impact beyond market turbulence. “Even if it were the first of many property developers to go bust in China, we suspect it would take a policy misstep for this to cause a sharp slowdown in its economy.

 

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