The problems facing Chinese real estate company Evergrande cut 2.5% from the Dow Jones Industrial Average and almost 11% from Bitcoin (BTC), 15% from Solana (SOL) and 16% from Ethereum (ETH ).
The question that many are asking is what does Evergrande have to do with cryptocurrencies to cause this widespread liquidation?
The answer to that is that there is probably a connection in the form of the US stablecoin Tether (supposedly backed 1: 1 by the US dollar).
Tether is the fourth largest crypto with a market capitalization of $ 68 billion, and some of its backing is rumored to be commercial paper issued by Evergrande, despite Tether’s claims to the contrary.
Many expected to take a hit
Even if Tether does not have any direct investment in Evergrande, most types of commercial paper will suffer if Evergrande defaults on loan payments due this week.
Evergrande is a major Chinese real estate development company that may default on more than $ 300 billion in debt, likely leading to a broader financial calamity in China and around the world due to the number of companies, banks and issuers of debt. with exposure to the company.
Tether is used as a substitute for the US dollar and as a way for traders to park the earnings from investing in cryptocurrencies, without having to leave the cryptographic ecosphere.
According to Coindesk, bitcoin’s share of managed crypto assets has fallen from 81% in January to 67% this week.
Solana’s price was hit by the widespread cryptocurrency sale and a 20-hour network outage, though this didn’t stop investors from piling up as the crypto pulled back from its recent high of $ 210 to around $ 141.
Revix says that while Evergrande may be driving the global correction in asset prices, this is not deterring professional traders from buying the dip.
El Salvador buys the dip
Among those who bought the drop over the past week was El Salvador, which announced that it had acquired another 150 BTC 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 thrilled, but S&P Global He warned that it would make the Central American government’s efforts to obtain a $ 1 billion loan from the Internal Monetary Fund more problematic.
Salvadoran President Nayib Bukele tweeted: “They will never beat you if you buy the sauces.” Then he added: “Presidential Council.” Clearly, this was not intended to be financial advice to the masses.
Market selloff is a sign of increased risk aversion
The cryptocurrency selloff, triggered by a break below the support of the S&P 500 index’s 50-day moving average, may signal a deeper break to the downside for risk assets, with Morgan Stanley warning of the possibility of a correction. of more than 20% for bitcoin.
The Federal Reserve’s Open Markets Committee is expected to announce the reduction of its monetary stimulus in the next two months, but if it decides to postpone it until 2022, risky assets may recoup their recent losses, according to Morgan Stanley.
While bitcoin has been equated with digital gold, its price behavior is more like that of other risk assets.