The Evergrande Crypto Conundrum. Here’s What Investors Should Know
To default or not default. That still appears to be the question…
Chinese property giant Evergrande Group has been teetering towards bankruptcy for months now. While the greater markets have seemed to mostly shrug the news off so far… there’s still reason for concern. And at least part of that is due to the Evergrande crypto relationship.
When we first started reporting on this situation, cryptos were quickly rising in value. Sound familiar? Because here we go again. Back in September, the crypto markets were trending upward in a big way. As you may have heard, the Chinese government isn’t a big fan of this. So once again, it rolled out the “China Bans Crypto” headlines again. In case you’re unfamiliar, this wasn’t the first time this story gained traction. Regardless, it was enough to send the crypto markets into retreat mode.
This time, however, things went a little differently. But the markets reacted just the same. You see, crypto is a dictionary definition of a headline-driven market. A spate of good news can send values rocketing upward. And any kind of bad news can have an equally depressing effect. And that’s what we’re dealing with today.
Late last night, the Associated Press reported that Evergrande had officially defaulted. Because of this, Deutsche Marktscreening Agentur (DMSA) began preparing for bankruptcy proceedings. However, it turns out a Clearstream spokesperson told Bloomberg that it did receive overdue interest on three bonds issued by Evergrande. But a portion of the damage was already done. Crypto values retreated in overnight trading. The problem though is that it seems not many people understand how Evergrande and crypto go together.
The Evergrande Crypto Connection Explained
If and when Evergrande defaults on its loans and goes under, experts agree that it will have ripple effects across the markets. How big and for how long is more debatable. Nonetheless, we can all expect some sort of fallout.
However, what’s not clearly understood is how Evergrande’s failure would lead to a downturn in crypto. Here’s a simple explainer…
Tether is the largest of what are referred to as stablecoins. This is a crypto backed by an asset. Once upon a time, it was thought that Tether was backed by U.S. currency. However, it turns out that most of the U.S. dollars backing Tether actually consisted of “commercial paper.” This is noteworthy because commercial paper is a much risker asset than Treasury bills.
Even worse, Tether has a substantial amount of holdings of Chinese debt to back up its value. A year ago, this might not have been seen as a bad idea. But what a difference a year makes. Property markets in China have slowed immensely. On top of this, the Chinese government started a campaign to stop lending to overleveraged developers – like Evergrande. So, without a supporting teat to suckle on, Evergrande was put in a very precarious position. But here’s the kicker. Evergrande is the second-largest property developer in China. And its debts amount to roughly 2% of the entire gross domestic product of China. If it defaults, Chinese debt doesn’t look like such a good investment anymore. And it certainly doesn’t make for a good asset to back up a stablecoin.
If Evergrande does eventually default on its debt obligations, Tether should take a major hit. However, the rest of the crypto markets shouldn’t. Keyword: shouldn’t. But that’s not how everyone sees the Evergrande crypto relationship.
Moving Forward
Crypto investors should see this as business as usual. Coming off its all-time high, Bitcoin retreated around 5% on the Evergrande news. Ethereum, Solana and Binance Coin fared even better. That’s good. And that makes sense. The only folks that should be sitting up and taking notice of this ordeal is Tether investors. The rest will deal with the normal ebbs and flows of the market. But by no means is this a reason to exit any other positions. It was just a normal situation of investors “selling on the news.”
The Bottom Line on the Evergrande Crypto Connection
Any crypto with a solid use case is going to withstand hyperbolic headlines. Crashes come and go. That’s how the markets work. But the cryptocurrencies with underlying technology behind them that are worthwhile will outlive any headline out of China. Even if there are some ups and downs in the process.
As a matter of fact, if you’re looking for the next-generation of cryptocurrencies poised to shape the future, we suggest signing up for Manward Financial Digest. In it, crypto expert Andy Snyder has been uncovering what he thinks are the next round of crypto investment opportunities set to go off. If you’d like to stay abreast of his research and what he’s uncovered, enter your email address in the box below.
About Matthew Makowski
Matthew Makowski is a senior research analyst and writer at Investment U. He has been studying and writing about the markets for 20 years. Equally comfortable identifying value stocks as he is discounts in the crypto markets, Matthew began mining Bitcoin in 2011 and has since honed his focus on the cryptocurrency markets as a whole. He is a graduate of Rutgers University and lives in Colorado with his dogs Dorito and Pretzel.