Gold no longer? Why Evergrande’s default crashed the cryptocurrency market by more than 20%

Chinese developer Evergrande Group defaulted on its bonds on Saturday morning. Investors in a panic collapsed bitcoin by 25%, but the fun begins on Monday.

China Construction Company China Evergrande Group December 4, 2021
posted the announcement, which warned shareholders and investors about the impossibility of guaranteeing the fulfillment of financial obligations and payment of interest on bonds in the amount of $ 260 million. Creditors got the right to prepare documents for declaring her bankrupt.

The unusually sharp reaction from the cryptocurrency market is due to the fact that the announcement was made late Friday evening Chinese time, when the rest of the world was already Saturday and all financial markets had already closed. Therefore, the cryptocurrency market turned out to be the only serious victim – only it works continuously on weekends. Investors had nothing more to sell to free up critical liquidity by Monday.

Without government support

To understand this situation, one should know the background of the collapse of China Evergrande Group. In 2021, Chinese construction company Evergrande faced more than $ 300 billion in debt on a total capitalization of $ 200 billion. By the end of 2021, the company had to pay interest on bonds in the amount of $ 669 million.

The bankruptcy of one of the largest developers in China will have a negative impact not only on the Chinese economy, but may also lead to a global economic crisis. Despite the inevitable loss of investor confidence in Chinese securities, the Chinese government refused to help the developer.

On November 27, authorities demanded that the founder of China Evergrande Group, Hui Ka Yan, use his own funds to pay off the company’s debts. In doing so, the government monitors the company’s bank accounts so that Evergrande spends money on completing construction projects rather than making payments to creditors.

When creditors did not receive coupon payments on bonds on November 10, the company was on the verge of default for the first time. On this day, a 30-day grace period expired. In total, Evergrande was to pay $ 148.1 million in interest on three bond issues maturing in 2022, 2023 and 2024. In particular, the German agency DMSA (German Market Screening Agency) announced that it had not received payments on the debt from Evergrande, in connection with which it is preparing documents for declaring the Chinese developer bankrupt and inviting all bondholders of the company to join it.

The company later paid $ 45 million in interest on bonds maturing in 2024 totaling $ 951 million ahead of the end of the 30-day grace period. A week earlier, also almost on the eve of the end of the grace period, the company transferred $ 83.5 million in interest payments to holders of other dollar bonds.

Prior to this, on November 9, the developer sold shares of the media company HengTen Networks Group for about $ 145 million in anticipation of the next maturity of the dollar bonds. Realizing that there will not be enough money to pay off interest on the bonds on November 18, the company announced that it would sell its stake in the HengTen Networks Group media company for $ 273 million.

This money was not enough to pay the next interest on the bonds, and the company did not manage to sell the second part of the shares. Therefore, in accordance with rule 13.09 of the law governing the listing of securities on the Hong Kong Stock Exchange Limited and Part XIVA of the Securities and Futures Ordinance (Chapter 571 of the Hong Kong Law), Evergrande has notified shareholders and investors that it is unable to repay the debt. … This means that the new week will begin with the collapse of stocks and other markets.

Is Bitcoin the Wrong Gold?

China Evergrande Group’s default information was released on December 4. Probably out of fear of a stock market reaction, the Chinese developer issued a notice when stock markets around the world were already closed. The bankruptcy of a company such as the China Evergrande Group could severely disrupt the Chinese financial system and trigger a new global economic crisis. After all, Evergrande’s $ 300 billion debt is equal to the GDP of a small developed country like Ireland.

As a result of a deliberate delay in the announcement, stock market investors were deprived of the opportunity, under the influence of emotions, to instantly go into reserve assets. Unlike the stock and futures market, the cryptocurrency market works seven days a week. As a result, investors began to hastily sell off cryptocurrencies in order to get dollar liquidity. After the markets open on Monday, these dollars will be invested in gold and other reserve assets – for example, the Swiss franc and government bonds of developed countries.

Obviously, a significant proportion of investors do not consider Bitcoin to be an analogue of gold and protection during a crisis. The strongly increased correlation of BTC with the S & P500 stock index in recent years suggests that large investors view bitcoin as part of a high-risk and high-yield part of portfolios along with stocks, and not as a stabilizing asset, similar to gold and government bonds. Therefore, in days of stock market panic, bitcoin “falls” even stronger than the stock market due to lack of liquidity.

The failure of the name Evergrande

It cannot be argued that only the default of China Evergrande Group caused the fall of bitcoin and the cryptocurrency market in general. The correction began a few days before this announcement. There are other reasons that have shaped Bitcoin’s downtrend over the past month.

The short-term downward movement of Bitcoin has been recorded since December 1, 2021. Over the past four days, the value of BTC has already fallen by an average of 25%, from a local maximum of $ 58,600 to $ 46,200. During the hours of panic, Bitcoin dropped to almost $ 42,000 for several minutes, and even broke through $ 30,000 on exchanges with low liquidity. On Sunday, Bitcoin several times tried to return to the previous levels, but was unable to break through the psychological resistance at $ 50,000.

Bitcoin’s sharp and unexpected drawdown of almost 30% led to a massive liquidation of traders’ margin positions. The total losses of traders amounted to more than $ 2.5 billion, of which losses on transactions with BTC – over $ 1 billion.

On Sunday evening, after a rollback up, the total cryptocurrency market capitalization fell by 17% compared to Friday evening, from $ 2.64 trillion to $ 2.26 trillion.

Crypto investors’ expectations for Monday are now tied to the dynamics of traditional markets after the weekend in the “new reality” of the Chinese government’s refusal to support large companies. The coming days are likely to determine the dynamics of the markets until the end of 2021. Since Bitcoin did not manage to form a significant rebound after the first wave of panic, the bulls’ hopes for a return to the highs are becoming more and more elusive. Growth can only resume if governments support the markets.

Other reasons for the fall of the cryptocurrency market

Analysts suggest that several additional reasons could have influenced the fall in the value of bitcoin. The simplest explanation is associated with profit taking by long-term investors after a long upward trend. Experts also highlight the factor of receiving negative information about the new Omicron coronavirus strain and the next round of quarantine restrictions. Evergrande’s default was only a trigger for a massive sale.

Some analysts note the uncertainty of private and institutional investors that has arisen in the cryptocurrency market in connection with the entry into force of the US Infrastructure Law, which introduces strict rules for exchanges and brokers related to the storage of cryptocurrencies and reporting to the fiscal authorities.

Another reason for investors’ doubts about the imminent growth of BTC may be associated with fears that the lenders of the failed cryptocurrency exchange MtGOX will receive compensation for losses and immediately bring it to the market. Trustee Nobuaki Kobayashi confirmed last week that the 141,000 BTC (about $ 7 billion) in custody will soon be distributed to those affected. And many of them will probably sell bitcoins that have risen in price hundreds of times.

According to Glassnode, there are about 4.2 million BTC in constant circulation, that is, less than a quarter of the total Bitcoin issue at the date of publication. The expected volume of coins put into circulation with MtGox will be more than 3% of the constant turnover of the asset, and an increase in supply will lead to a drop in prices in the short term. All the more so if the fall in the stock markets drags on.

Experts agree that new highs in BTC are inevitable, but Bitcoin’s return to positions in early November will be long and gradual. The market has lost momentum, and cryptocurrencies are characterized by very deep corrections. Each subsequent cycle of asset growth lasts much longer than the previous one.