Why Evergrande bankruptcy is causing anxiety in crypto market
The past few days have seen the price of major cryptocurrencies suffer declines on the news of an impending bankruptcy by Evergrande, China’s second-largest property developer by sales.
Bitcoin, the world’s largest cryptocurrency dropped 9 percent to less than $42,669 on Monday while Ether princess fell nearly 10 percent to a low of $2,940, marking each of their lowest levels since August. On Wednesday the price of bitcoin continues to slide at $42,233, representing 2.28 percent in the last 24 hours and 11.08 percent.
Evergrande is facing bankruptcy over its inability to pay over $300 billion in debt. The company alerted banks last week it would be unable to make debt payments due this month, sparking a sharp drop in the Chinese real estate sector.
Experts say the company may have struggled with new rules brought in last year by the Chinese government aimed at controlling the amount owed by big real estate developers. Following the new rules, Evergrande was forced to offer its properties to buyers at massive discounts to ensure the money keeps coming to the business. The plan hasn’t quite worked out for Evergrande. It is currently struggling to settle interest payments on its debts.
The company’s shares listed in the Hong Kong Stock Exchange tumbled nearly 90 percent this year. The stock has lost more than 20 percent in the last five trading days and investors are watching to see if the highly indebted real estate company will be able to make millions of dollars in interest payments on US dollar-denominated bonds in the coming days.
Evergrande reportedly owes money to around 171 domestic banks and 121 financial firms. Hence, should the company go bust, it could have serious consequences for the Chinese economy and the world too. If Evergrande defaults, banks and other lenders may be forced to lend less.
Also, many people bought properties from Evergrande even before building work began. These individuals have paid deposits and could potentially lose their money. There are also companies that do business with Evergrande, these include construction and design firms and material suppliers that are at risk of incurring major losses which could also force them into bankruptcy.
How does this affect the price of bitcoin and the crypto market?
First, it is not only the crypto market that is reacting to the Evergrande selloff, as the global market has also been plunged into the red zone.
The general fear, according to experts at Luno and Arcane Research, is that the possible bankruptcy of the company would spill over to other industries, especially assets considered to be highly risky. The import of the situation became obvious as more than crypto 272,000 traders had their accounts liquidated within 24 hours equal to around $1.3 billion worth of crypto, according to data from Bybt, a crypto futures trading and information platform.
Since the Friday close, the Hang Seng index – the main indicator of the overall market performance in Hong Kong – has fallen 3.86 percent, while other indexes globally have also seen a substantial sell-off amid the Evergrande crisis. The Nasdaq and the S & P 500 closed down 2.2 percent and 1.7 percent respectively.
Gold is likely the only asset that appears not affected by the looming crisis. Gold is up 0.5 percent since the Friday close, behaving like a safe haven asset.
The experts at Luno and Arcane Research said the decline in the price of bitcoin suggests that the crypto may not be a store of value or safe haven in the short term despite its reputed scarcity.
“It is clear that bitcoin currently behaves like a risk asset in the short run,” the experts said in a joint weekly report of the cryptocurrency market. “This is not the first time bitcoin has behaved as a risk asset during looming uncertainty. See March 2020 for example. In March 2020, bitcoin initially saw a massive decline during the global crash. However, we all know what happened with bitcoin in the following 12 months as governments and central banks worldwide initiated fiscal and monetary stimulus to the markets. While bitcoin currently behaves like a risk asset, the market is a device for transferring money from the impatient to the patient.”
On Wednesday, Evergrande said it would pay the interest on time on a mainland-traded bond denominated in Yuan. While the market waits for the company on other interest that are also due this week, experts say bitcoin becoming more integrated into global financial markets means it should respond more to the changes in risk appetite that drives global sentiment.