The troubles facing Chinese real estate company Evergrande lopped 2.5% off the Dow Jones Industrial Average and nearly 11% off Bitcoin (BTC), 15% off Solana (SOL) and 16% off Ethereum (ETH).
The question many are asking is what Evergrande has to do with cryptos to prompt this general sell-off?
The answer to that is there probably is a connection in the form of US stablecoin Tether (supposedly backed 1:1 by the US dollar).
Tether is the fourth-largest crypto with a market cap of $68 billion, and part of its backing is rumoured by be commercial paper issued by Evergrande – notwithstanding Tether’s assertions to the contrary.
Many expected to take a hit
Even if Tether does not have any direct investment in Evergrande, most forms of commercial paper will take a hit should Evergrande default on loan repayments which fall due this week.
Evergrande is a major Chinese property development company that may default on more than $300 billion in debts, likely sparking a broader financial calamity in China and across the globe due to the number of companies, banks and debt issuers with exposure to the company.
Tether is used as a surrogate for the US dollar and as a way for traders to park profits from crypto investing, without having to leave the crypto eco-sphere.
According to Coindesk, bitcoin’s share of crypto assets under management has fallen from 81% in January to 67% this week.
Solana’s price was hit by the general crypto sell-off and a 20-hour network outage, though this did not stop investors piling in as the crypto retreated from its recent high of $210 to around $141.
Revix says while Evergrande may be driving the global correction in asset prices, this isn’t deterring pro traders from buying the dip.
El Salvador buys the dip
Among those buying the dip over the last week was El Salvador, which announced that it had acquired another 150 BTC at below $46 000, bringing the country’s total BTC holdings to 700. El Salvador recently announced that it would accept BTC as legal tender. That got the Bitcoin crowd excited, but S&P Global warned that it would make the Central American government’s efforts to raise a $1 billion loan from the Internal Monetary Fund more problematic.
Salvadoran President Nayib Bukele tweeted: “They can never beat you if you buy the dips.” Then added: “Presidential advice.” This was clearly not intended as financial advice for the masses.
Market sell-off a sign of broader risk aversion
The crypto sell-off, prompted by a break below the S&P 500 Index 50-day moving average support, may signal a deeper downside break for risk assets, with Morgan Stanley warning of potential for a 20%+ correction for bitcoin.
The Federal Reserve’s Open Markets Committee is expected to announce the tapering of its monetary stimulus in the next two months, but should it decide to push this out to 2022, risk assets may recover their recent losses, according to Morgan Stanley.
While bitcoin has been equated to digital gold, its price behaviour more closely resembles that of other risk assets.