How China’s Property Market Could Trigger a Crypto Crash

Bitcoin, the world’s largest cryptocurrency, was off 7% Monday to around $44,000. Ethereum, the second-largest cryptocurrency, was down 8% at around $3,100. Smaller coins were also posting declines, including Cardano, Binance, XRP, Solana, and Polkadot—the latter off 13% to $29.48.

For now, there’s no direct link between Evergrande and the crypto universe. It appears to be a case of widespread risk aversion, with investors going to cash.

But here’s how Evergrande’s troubles could ripple into the crypto markets.

For one, financial shock waves tend to hit through the crypto markets quickly, partly because they never stop trading—investors can buy and sell cryptos 24/7 on multiple global exchanges and decentralized trading platforms.

Cryptos are also generally held as speculative investments, much more than for fundamental reasons. Traders tend to buy and sell on momentum signals and use derivatives to gain exposure, and they may exit fast at the first whiffs of trouble.

“Once the Chinese stock market closes, a lot of people may sell crypto to raise cash,” says Stephane Ouellette, CEO of FRNT Financial, a crypto derivatives firm in Toronto. “We’ve observed correlations to cryptos during large sell-offs and you tend to see it a couple hours later; they take a leg down.”

Stablecoin issuers could also run into trouble if China’s commercial-paper market starts to wobble. Tether, the world’s largest stablecoin, said last week that it doesn’t hold any securities issued by Evergrande.

But that isn’t reassuring to some crypto analysts, who point out that Evergrande backs roughly $300 billion in debt, spread across many banks and other financial companies. A default could ripple through China’s commercial paper and short-term securities markets, spilling over to stablecoin reserves.

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

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

The company added that it doesn’t disclose counterparties because “we are in a commercially sensitive business,” and we “have to respect their privacy.”

Some analysts say that a commercial-paper meltdown in China would rock other sectors much more than stablecoins. “I’d argue that pension plans would be more affected,” says Ouellette. “Stablecoins hold a decent portions of their assets in fiat currency. The Chinese banks would be in much bigger trouble in a paper meltdown…