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Bitcoin and other cryptocurrencies collapsed on Monday amid a global sell-off of risky assets.
The fall appears to have been triggered by growing problems at ailing real estate giant China Evergrande Group.
Bitcoin, the world’s largest cryptocurrency, was down 7% on Monday to around $ 44,000. Ethereum, the second largest cryptocurrency, fell 8% to around $ 3,100. Smaller coins were also showing declines, including Cardano, Binance, XRP, Solana and Polkadot, the latter down 13% to $ 29.48.
For now, there is no direct link between Evergrande and the crypto universe. This appears to be a case of widespread risk aversion, with investors going for cash.
But here’s how Evergrande’s problems could spill over into the crypto markets.
On the one hand, financial shockwaves tend to hit crypto markets quickly, in part because they never stop trading – investors can buy and sell cryptos 24/7 on several global exchanges and decentralized trading platforms.
Cryptos are also generally held as speculative investments, much more than for fundamental reasons. Traders tend to buy and sell on momentum signals and use derivatives to gain exposure, and they can exit quickly at the first flush of trouble.
“Once the Chinese stock exchange is closed, a lot of people can sell crypto to raise funds,” says Stéphane Ouellette, CEO of FRNT Financial, a crypto derivatives firm in Toronto. “We have seen correlations with cryptos during massive sell-offs and you tend to see it a few hours later; they are getting ahead of the game.
Stablecoin issuers could also have problems if the Chinese commercial paper market begins to falter. Tether, the world’s largest stablecoin, said last week that it does not own any securities issued by Evergrande.
But that doesn’t reassure some crypto analysts, who point out that Evergrande backs debt of around $ 300 billion, spread across many banks and other financial firms. A default could spill over into China’s commercial paper and short-term securities markets, spilling over into stable coin reserves.
“Even though Tether does not specifically hold any short-term debt from Evergrande, it could have huge exposure in the form of other Chinese bonds,” writes CoinDesk columnist David Morris.
Tether, in a statement to Barron’s, said it “has a strong, liquid and prudent portfolio that emphasizes safeguarding our reserves. The vast majority of commercial paper held by Tether is owned by issuers rated A-2 and above. ”
The company added that it was not disclosing the counterparties because “we are in a commercially sensitive business” and “must respect their privacy.”
Some analysts say a collapse of commercial paper in China would upend other sectors far more than stablecoins. “I would say pension plans would be more affected,” Ouellette said. “Stablecoins hold a decent portion of their assets in fiat currency. Chinese banks would have bigger problems in a paper collapse than Tether. “
Even though stablecoins don’t “break the buck,” traders in Asia can liquidate cryptos to raise funds in anticipation of further lows. Many traders use leverage to gain exposure; they could face margin calls when prices fall, forcing them to liquidate positions, or their positions may be automatically liquidated by the exchanges.
Institutional investors in Asia are more exposed to cryptos than those in the United States or Europe. More than 70% of institutional investors in Asia have allocations to digital assets, compared to 56% in Europe and 33% in the United States, according to a recent survey by Fidelity Digital Assets. These figures are all up sharply compared to 2020.
Bitcoin itself now looks technically fragile. The fall into the $ 44,000 range broke a multi-month technical uptrend, says Michael Boutros, technical strategist at DailyFx.com. Even if it climbs back to $ 47,000, it should close slightly higher to break through technical resistance at that level.
“As long as it’s below $ 47,000, the risk is to hit another low,” he says. The next buy level would be $ 41,900, and if it drops to $ 38,777 it would be “buy of the year”.
Another note is that Bitcoin’s techniques resemble those of the S&P 500, which is also breaking support levels, Boutros explains.
Cryptos could face their most difficult test in years if a wave of contagion spills over into financial markets. For now, they are failing.
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