Why Are The Crypto Markets Going Down This Time?
As always there will be a myriad of reasons why crypto markets have dropped again.
Evergrande (Equity Markets Are Scared)
Evergrande is (for now) a Fortune 500 property company based in China. It’s big. It had sales of more than $100 billion in 2020.
Evergrande builds homes in China. It has also made investments in internet companies, media, theme parks, football, mineral and water companies (Weird).
Building houses costs time and money. You need the money at the beginning to build the house and you make the money back when you sell the house.
How do you get the money to build the house in the first place..?
Debt
Evergrande borrowed billions. It borrowed so much it became the world’s most heavily-indebted developer with debts of $300 billion. Evergrande owes this money to investors, contractors and anyone that paid a deposit on one of its properties. Borrowing money isn’t normally a big deal. As long people are buying the houses you build its normally ok. There is however a risk:
The more you borrow the more interest you have to pay
Interest has to be paid by periodically (once a month/year)
If you don’t sell many homes one month/year you might not be able to pay your interest payments
These interest payments need to be made otherwise people get scared
In June 2021 Evergrande signalled it may not be able to keep up with the interest payments. Evergrande started tapping into ‘creative’ financing strategies to pay its debts..
This didn’t work and its financial position is growing increasingly perilous. Evergrande needs to pay $166 billion by the end of 2021 and another $166 billion by the end of 2022.
It can’t.
It’s fucked.
What Can It Do?
What ensues now is a rigged game of musical chairs on who gets to feast on Evergrande’s festering corpse first. Order of priority is as follows:
Chinese State
Suppliers
Investors
Employees
The Chinese state gets first dibs and will take what it needs. It can also force management to do what it says. Everyone else is screwed!
China could also potentially step in and back stop the company to save face. This however is the state taking full control of the business and they may as well rename it Xigrande at that point. (Xi being the supreme leader of the CCP) .
Why Does This Affect Crypto?
Because this affects everything. A lot of Western Money was tied up in Evergrande and nobody likes taking losses, especially from what shouldn’t have been a risky investment. Investors are now worried about contagion (knock on effects) and this is already being felt as follows:
Mining stocks are down (China is a big importer of commodities)
Iron ore price has fallen 60% (Australia’s main export) since July 2021
European Stocks are down.
Bad news in China strengthens the US Dollar. As the dollar goes up Crypto prices go down.
A number of talking heads are raising the alarm, making comparisons to the Great Financial Crash of 2008. It puts China in a sticky position as they can either bailout Evergrande (enabling bad business practices) or let die (and tank the market with it). Either way the psychological impact will be huge. Guess we will see…
US Federal Reserve is Meeting This Week
The US Federal Reserves is meeting this week to possibly discuss when it will stop buying government debt. If it does stop buying we expect that will spook the markets too.
Largarde Remains Unconvinced Regarding Crypto
The good news is that she likes stable coins (crypto currencies that are pegged to the Pound/Dollar/Euro and are not volatile). As the European Central Bank is building a stable coin we would surprised if she didn’t like them.
Nasdaq Publishes Bullish Bitcoin Article
Until Next Time
The Wealth Gap
Evergrande has confirmed that a deal has now been struck. The world can abandon its panic stations for now.