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 Bitcoin 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.
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. The premise of another Lehman Brothers catalyzing event for the global economy has taken shape after the Chinese government informed banks Evergrande would not meet interest payments due September 20th.
Investors foresee a gloomy end to the Evergrande story. If the company goes under, it will be one of the biggest corporate collapses of our time. According to CNN, Evergrande stock has dropped by 85% in 2021, and the company is hoping for a Beijing bailout. But what does that have to do with the state of the crypto market?
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. A Fidelity Investments survey shows that 71% of Asian institutional investors allocate part of their portfolio to crypto-assets. Thus, a dip in the Hong Kong Stock Exchange means companies partnered with Evergrande could be forced to liquidate their positions for cash. Moreover, in a Barron’s article, Daren Fonda wrote that the market response is mainly due to “investors going to cash.”
Tether Can Break the Crypto Market
Tether, the largest stablecoin by market capitalization, is a Hong Kong-based cryptocurrency. Operating in the same financial sandbox as Evergrande makes the company susceptible to becoming collateral in the economic war. Tether entered the spotlight after concerns surfaced that the company owns Chinese and even Evergrande commercial papers (CP) or certificates of deposits (CD) to back up their USDT.
According to Reuters, Tether announced it does not hold any commercial papers; however, David Morris notes that Tether might still have exposure to Chinese obligations or other forms of investments tied 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. While crypto is not directly tied to the Evergrande fiasco, investors should follow the events as collateral for a possible financial failure.
Bitcoin has been perceived for a time as a hedge against inflation and an asset that does not follow regular financial norms. However, suppose the crypto market is affected by the Evergrande financial blunder. In that case, Bitcoin will lose status in the eyes of maximalists as it will become the same financial tool it seeks to replace.