How China’s Property Market Could Trigger a Crypto Crash

Bitcoin and other cryptocurrencies were crashing on Monday amid a global sell-off in risky assets.

The reason for the collapse appears to be the growing problems of the embattled real estate group China Evergrande Group.

Bitcoin, the world’s largest cryptocurrency, fell 7% on Monday to around $44,000. Ethereum, the second largest cryptocurrency, is down 8% at around $3,100. Smaller coins also registered lower declines, including Cardano, Binance, XRP, Solana and Polkadot – the latter dropping 13% to $29.48.

At the moment, there is no direct link between Evergrande and the crypto world. It appears to be widespread risk aversion, as investors turn to cash.

But here’s how Evergrande’s problems can spread in the crypto markets.

First, financial shock waves tend to hit the cryptocurrency markets quickly, in part because they never stop trading — investors can buy and sell cryptocurrencies 24/7 on many global exchanges and decentralized trading platforms.

Cryptocurrencies are also generally held as speculative investments, much more than the underlying causes. Traders tend to buy and sell based on momentum signals and use derivatives to gain exposure, and they may get out quickly at the first whiff of trouble.

“Once the Chinese stock market closes, a lot of people may sell cryptocurrencies to raise money,” says Stephen Owlett, CEO of FRNT Financial, a crypto derivatives company in Toronto. “We noticed correlations with cryptocurrencies during the heavy selling, and you tend to see them a couple of hours later; they take their leg.”

Stablecoin issuers may also face a problem if the commercial paper market in China starts to fluctuate. Tether, the world’s largest stablecoin, said last week that it does not own any securities issued by Evergrande.

But this does not reassure some cryptocurrency analysts, who point out that Evergrande is backed by nearly $300 billion in debt, spread across many banks and other financial firms. Defaults can spread through Chinese commercial paper and short-term stock markets, and extend to stable currency reserves.

“Even if Tether doesn’t specifically hold any of Evergrande’s short-term debt, it could still have significant exposure in the form of other Chinese liabilities,” CoinDesk columnist David Morris wrote.

Tether, in a statement to Barron’s, said it “has a strong, liquid and conservative portfolio with an emphasis on protecting our reserves. The vast majority of commercial paper held by Tether is in A-2 and above rated issuers.”

The company added that it does not disclose counterparties because “we operate in a sensitive business” and “must respect their privacy”.

Some analysts say the collapse of commercial paper in China will shake up other sectors more than the stablecoins. “I would argue that pension plans would be more affected,” Ouellette says. “Stablecoins hold a decent portion of their assets in fiat currency. Chinese banks will be in much more trouble in the event of a paper collapse than tether.”

Even if the stablecoin does not break, traders in Asia may liquidate the cryptocurrency to collect liquidity in anticipation of further declines. Many traders use leverage to gain exposure; They may encounter margin calls as prices fall, forcing them to liquidate positions, or their positions may be automatically liquidated by exchanges.

Institutional investors in Asia have more exposure to cryptocurrencies than investors in the United States or Europe. More than 70% of institutional investors in Asia have an allocation to digital assets, compared to 56% in Europe and 33% in the United States, according to a recent survey by Fidelity Digital Assets. All of these numbers have risen sharply since 2020.

Bitcoin itself now looks shaky from a technical point of view. Michael Boutros, chief strategist at DailyFx.com, says the drop in the $44,000 range has broken a multi-month technical uptrend. Even if it goes up to $47,000, it will have to close a little higher to break the technical resistance at that level.

“As long as it’s below $47,000, the risk is another low,” he says. The next level for buying will be $41,900, and if it goes down to $38,777, it will be Buy of the Year.

Another note is that Bitcoin’s technicals look similar to the S&P 500, which is also breaking through support levels, says Boutros.

Cryptocurrencies could face their strongest test in years if a wave of contagion spreads through the financial markets. So far, they have failed.

Write to daren.fonda@barrons.com

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