Evergrande’s ongoing bankruptcy saga has significant macroeconomic implications — including for the global cryptocurrency market.
As Evergrande Group, China’s heavily indebted property developer, files for bankruptcy in the United States, many are concerned about how this will impact the global economy and cryptocurrencies. The situation represents one of the largest debt faultings in the world and will have sizable ramifications.
However, it shouldn’t come as too much of a surprise that China’s real estate agent running out of money to cover debt is causing worry within the crypto space. While many fear Evergrande’s collapse will cause a knock-on effect for other tokens and coins already vulnerable in financial markets, the increased crypto volatility could be the silver lining for investors.
Market uncertainty and volatility
The collapse of a significant financial player like Evergrande could generate uncertainty and volatility across all asset classes, including cryptocurrencies. There’s no denying the crypto market is volatile. In other words, even the slightest hit to the status quo can cause the price of even the biggest cryptocurrencies to go down the dumps or through the roof.
This is even the case for Bitcoin. Cryptocurrencies are falling as concerns around China result in risk off-sentiment. Leading analysts have reported that the downturn in the crypto market is no big deal. However, investors are still in a hurry to liquidate their crypto funds. This is likely due to the fear of China’s crisis disrupting the biggest worldwide financial balance.
Evergrande, one of China’s real estate giants, just filed Chapter 15 bankruptcy.
Meanwhile, China’s HY real estate index is down a massive 82% in just over 2 years.
This puts the index back down to 2008-levels.
All while China just “unexpectedly” cut interest rates.
Is China… pic.twitter.com/p3yuIqPmxL
— The Kobeissi Letter (@KobeissiLetter) August 18, 2023
Investors may either flee to cryptocurrencies as a hedge against traditional markets or sell off crypto assets to cover losses elsewhere. Additionally, volatility is being harnessed by professional traders to book profits by selling during recovery and purchasing the dip. Bitcoin miners, then, are holding on to their funds even as it becomes increasingly challenging to mine for the cryptocurrency.
If Evergrande’s collapse results in tightened credit markets, liquidity could become scarce. Cryptocurrency may be liquidated en masse to cover losses or meet margin calls, causing a temporary price drop. Tether accounts for around half of the market capitalization of stablecoins and is a significant component of crypto market liquidity.
Tether is quite active in Asia, and there was some concern that some of USDT’s backing would be Evergrande commercial paper. Therefore, the collapse in Evergrande would be poor news for Tether and the market as a whole. While Tether issued a statement recently stating it does not hold any Evergrande paper, that doesn’t mean it is entirely free from Evergrande-related risks. Ultimately, this situation could cause a broader liquidity crisis within the industry.
Influence on Chinese cryptocurrency activity
There’s no denying the Evergrande collapse is occurring at a delicate time for China’s economy. The fallout from the collapse has affected banks, smaller suppliers, and even worldwide markets exposed to Evergrande’s debt. Considering that Evergrande is a Chinese company, its collapse could have specific implications for crypto markets in China.
These implications come from concerns about Tether’s holdings and that crypto is vulnerable to downturns in the broader market. Given China’s complex relationship with cryptocurrencies, any financial instability could lead to regulatory shifts that impact crypto adoption or trading within the country. It’s clear Evergrande’s challenges are part of a much larger set of issues within the sale of Chinese equities in global markets.
While the collapse of Evergrande may seem as though it is about nothing more than the company, there is more to it. China is one of the world’s leading economies, and Evergrande is one of the largest companies within the Chinese economy.
Therefore, the fallout has presented significant macroeconomic implications. If a broader economic downturn is yet to come, cryptocurrencies could benefit as a “safe haven” asset. Due to their limited supply and lack of dependence on national governments, crypto assets can be key in times of crisis.
Additionally, cryptocurrency prices seem to be less affected by macroeconomic elements than prices of more traditional financial assets. Paradoxically, financial crises often lead to increased innovation and adoption of alternative financial systems.
In other words, in times of desperation, leaders and developers are encouraged to engage in outside-the-box thinking and devise effective and unique solutions. Bitcoin, for example, was born after a crisis, and the crypto market was developed as an alternative to the traditional economy.
It’s difficult to say whether events that occur in the broader economy will truly threaten crypto markets. A global economic slowdown ideally shouldn’t materially impact the price of cryptocurrencies, and crypto should be considered a speculative asset.
Therefore, Evergrande’s collapse could be an opportunity for the crypto market. The collapse of these traditional structures and encouraging a separation between the traditional and crypto economies could accelerate interest in decentralized finance solutions.