How will the Evergrande crisis affect the Bitcoin market?
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How will the Evergrande crisis affect the Bitcoin market?
Bitcoin could be the perfect solution to hedge against the Evergrande bankruptcy crisis.
Navigating Web3 tides with focused insightsOriginal title: "Will 'Evergrande's Collapse' Destroy Bitcoin?"
Author: new realities
Translator: Chen Zou
First S&P. Then Moody's. Then Fitch.
And this morning, JPMorgan.
It’s now hard not to know about the explosive news of Evergrande’s collapse—hundreds of billions in collateral issues have led many commentators to say that compared to this, Lehman Brothers looked like a firecracker. This time, Chinese regulators are unlikely to take rescue measures similar to those seen historically.
If Evergrande goes bankrupt, there may be no one left to pick up the pieces. And Bitcoin could be the perfect solution to hedge against the shock, helping prevent real economic damage to China.
To understand how we got here, let’s go back a few weeks—to when the Evergrande bomb first began detonating:
Evergrande’s liabilities involve more than 128 banks and over 121 non-bank institutions. JPMorgan estimated last week that China Minsheng Bank has the largest exposure to Evergrande.
—— Reuters
What is Evergrande, and how did this crisis start?
Evergrande is one of the world’s largest real estate developers, listed in Hong Kong. More formally known as Evergrande Group, this massive Chinese property company made Xu Jiayin the richest man in China. The nationwide conglomerate operates across technology, automobiles, electric vehicles, consumer goods, tourism, and its core financial and real estate businesses.
It became widely known for years of exploiting policy-driven, extremely high leverage to generate outsized profits. In its latest figures, its total assets were just over $147 billion.
The only problem? The company’s debt-to-asset ratio (leverage) stands at 6. (Regulatory compliance requires around 0.3.) Naturally, such excessive leverage has triggered numerous lawsuits from creditors.
In principle, this might sound manageable—but under the current domestic context of deleveraging and curbing housing prices, the situation has taken a different turn.
Why is Evergrande facing a liquidity crisis?
At the beginning of 2021, the Chinese government tightened credit and set caps on mortgage quotas to prevent a nationwide, multi-billion-yuan real estate bubble in densely populated cities—cities filled with young homeowners, but also households struggling financially due to the coronavirus crisis.
This adjustment directly affected property sales, but backfired—the prices didn’t fall; they rose. Four months later, the government had to intervene again, raising mortgage rates after a spike in home prices, further reducing property sales.
As for the market, Evergrande investors are already in despair. Evergrande Group’s stock has dropped 60% this year, currently sitting at a four-year low. All of this happened before the Chinese government demanded that Evergrande comply with a requirement issued last month to repay 40% of its debt in a lump sum.
But clearly, the debt was not repaid.
CNBC reported that S&P began downgrading the company’s credit rating as early as August.
On August 5, the ratings agency downgraded Evergrande and its subsidiaries from "B-" to "CCC," citing expectations that "the risk of non-payment is escalating, as increasing asset freezes by commercial parties indicate tightening liquidity."
—— CNBC; August 20, 2021
Now fast-forward a few weeks. Headlines about Evergrande are now as frequent as their claimed cash flows:
Fitch downgraded Evergrande’s credit rating to CC (two levels worse than potential default—extremely poor credit)
Moody’s downgraded Evergrande by three notches to Ca (meaning the company is likely already in or very close to default)
On the same day Moody’s announced its downgrade, reports surfaced of worker protests at Evergrande sites—employees hadn’t been paid, and their employer had no spare cash to cover wages.
On September 10, JPMorgan slashed its price target for Evergrande stock from $7.20 to $2.80. They maintained a slightly more optimistic view, believing Evergrande would ultimately achieve a soft landing.
Even a soft landing still means landing—and that won’t help investors and partners holding vast amounts of Evergrande bonds. Their bonds have turned into nightmares, rapidly losing value.
But given the current domestic policy environment, "soft landing" itself is already a joke.
How will Evergrande affect the Bitcoin market?
Tether is a dollar-pegged stablecoin, well-known to anyone familiar with cryptocurrency. Its issuer, Tether Limited, is controlled by the owners of Bitfinex and headquartered in Hong Kong. Tether has been riding the storm of public scrutiny for months: its reserve assets are the emperor’s new clothes, and all investors really know about what backs these assets are a few promises from Tether.
Tether has been reluctant to disclose details of its commercial paper holdings (citing non-existent "privacy" concerns), but it's undeniable that most of these papers originate from China. Tether claims it has never refused a redemption request. After staying silent about the actual leverage in stablecoins, Tether executives quietly admitted this summer that half of their currency is backed by bonds.
Although both Tether and Evergrande come from the same region, that doesn't necessarily mean Tether holds Evergrande bonds. Realistically, given the criticism Tether has faced over the past 12 months, it should immediately go to great lengths to publicly clarify it has no ties to Evergrande. But in fact, Tether has remained unusually quiet this month. Some observers believe plans are already being made—especially as China’s CBDC development is helping its "shadow" crypto economy move away from Tether and Bitcoin, while the government tightens control and oversight over money at both institutional and consumer levels.
There are two possible outcomes here.
Some believe China will not bail out Evergrande, forcing it into liquidation. Evergrande would then dump its holdings across the market to unwind leveraged bond positions (this doesn’t even include leveraged note debt—we’re only talking about leveraged notes), creating market liquidity and causing repeated crashes in Tether and Bitcoin prices. But everyone forgets another Tether—not pegged to the dollar. A yuan-pegged Tether, currently running on Ethereum but not yet officially listed on any exchange. But what backs this token? How could the Chinese government possibly allow its existence?
China “rescues” Evergrande. Then they could use CBDC and bonds to suppress Bitcoin and the US dollar (and possibly other fiat currencies like the Australian dollar, a dumping ground for many Chinese products and construction materials), sell off Bitcoin and USD/AUD to repay debts, putting immense pressure on the dollar. For China, this remains a relatively soft yet attractive solution—it achieves a triple win for higher political objectives:
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Reduce public confidence in CBDCs other than the digital yuan
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Destroy Tether
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Force the US dollar to depreciate.
How could Evergrande create lasting impacts on Bitcoin?
Most Bitcoin investors have weathered storms like this before. However, if either of the above scenarios unfolds, we may face an unprecedented new kind of storm. If billions of dollars in worthless paper and commercial bonds are laundered through Bitcoin, the scale of impact on Tether, Bitcoin, and Ethereum would be enormous. This means China could inflate cryptocurrency prices to cover their losses, bridge the gap in fiat debt, and then crash everything back down to restore market liquidity.
These signals tell investors to treat the current reality with greater caution—that Bitcoin is an asset, not a currency.
There’s an obscure maxim: If money rules the world, debt is the best weapon.
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