September 23, 2021 · 6 min read

Evergrande - Not Evergreen: What the Chinese Property Giant’s Failure Means for Crypto’s ‘Fiat-Independence’

The impending fall of Chinese real estate giant Evergrande has implications for financial markets all over the world. While the CCP might yet bail the company out, the uncertainty is what is driving market dips. Even in the scenario of a government bailout, the necessity for the bailout to be made in USD would still cause a spike in the US dollar and have financial implications therein. Most market activity is currently based on an assumption that the group will enter bankruptcy. Why however would the downfall of a Chinese real estate developer have such profound implications for both crypto and fiat(conventional currency) markets? Let’s take a look. 

Evergrande - Not Evergreen  

In addition to being one of the largest real estate developers in the country, Evergrande is also the largest issuer of commercial paper (short-term liabilities) in China. Concerns had already been raised surrounding the future of the developer earlier this year in July, when Evergrande debt reached $88b. Preempting developments in the group’s financial situation, equity markets have been creeping downwards since mid-August. It appears however that things came to a head this month. Equity markets have begun to show signs of recovery over the last few days, but at the time of writing both the Dow Jones and FTSE 100 remain down more than 4% since the beginning of September - the full effects of this event are yet unknown.

Dow Jones/FTSE 100 since Aug 2021

Can the Haven Really be Considered ‘Safe’?

Fiat equity however is far from being the only market affected by the crash. Crypto too has felt the effect of preemptive market activity and has seen far greater losses over the same time period. Since September 1st, Bitcoin has dropped almost 15% - currently sitting at around $43,172.  

Dow Jones/FTSE 100/BTC/ETH since Aug 2021

Crypto currencies such as Bitcoin are often considered financial ‘safe havens’ - or at the very least to be somewhat protected from fiat market crashes. If the above graph demonstrates anything, it is that the crypto market might not be as untethered from ‘real-world’ events as both developers and investors might believe. Volatility is largely inevitable in the case of most cryptocurrencies - but what might be driving crypto’s recent contingency on fiat indexes? The answer might lie with stablecoins and their increasing importance to the crypto market. 

The Trouble With Tether   

The most prominent stablecoin by volume, Tether currently constitutes more than 80% of all crypto transactions. When this proportion is considered, the influence of the currency on the crypto market as a whole is undeniable. As the name suggests, the currency’s main purpose is to remain tethered to the value of USD to facilitate ‘ease of transaction’ between crypto and fiat currencies. Most of this ease lies in stablecoins providing the ability to lock-in gains quickly and avoid cumbersome conversions. 

The Top 3 Cryptocurrencies by Volume

Nonetheless, the ‘stability’ of so-called stablecoins is worth consideration. More than 65% of Tether’s reserves are currently held in commercial paper. Many stable coins such as USDC(USD Coin) and BUSD(Binance USD) have commercial paper based reserves, but speculation within the crypto industry predicted a considerable portion of Tether’s to have been supplied from China and very possibly by Evergrande. 

Having such a large portion of the currency’s reserve compromised could result in Tether becoming untethered from USD - with ripple effects felt throughout the DeFI industry. Tether’s initial silence regarding Evergrande developments led many to believe that it was indeed the source of at least some of its reserve - as it was thought that the company would have jumped at the opportunity to dissociate itself from the tanking real estate giant. These concerns may indeed have been contributing to heightened crypto market volatility over the last few weeks.  

A Tale of Two Currency Models  

In a twist however, last Wednesday(Sep 15th) Tether’s spokesperson Alex Welch stated that “Tether does not hold any commercial paper or other debt or securities issued by Evergrande and has never done so.” Many were curious as to why the statement was released so late when it would undoubtedly have been in Tether’s best interests to release the statement as quickly as possible - the answer is as of yet unknown.

This should spark thought surrounding just how separate the worlds of fiat and crypto currencies truly are. Stablecoins such as Tether, USDC and BUSD provide immense convenience in the form of the ability to quickly secure fiat-gains. Although in doing so, crypto markets become inextricably linked to their fiat counterparts. Increasingly, fiat-market events that might not initially be considered directly related to crypto markets are becoming so - perhaps due to similarly increasing institutional investment in said markets seen over the last few years. Conversely, crypto market activity can have significant implications for conventional currencies. 

Although crypto markets seem to have recovered from a deep rout on Wednesday in response to Evergrande fears, investors are advised to be vigilant in case market conditions worsen. An allocation to lower-risk stable coins is sensible in a diverse crypto portfolio, and may be a good moment to begin taking some profits for investors. The risk of the commercial paper market freezing could seriously damage trust in Tether - which would have implications for the wider crypto world as well. As a result, DAI and USDC are likely to be less risky than USDT(Tether). If there is something to be learned however, it is that events such as the Evergrande crash should remind investors to be prudent with the knowledge that the realm of crypto might not be as independent from its fiat counterpart as one might think.   

Rob Henderson - Novum Insights

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