Chinese Real Estate Giant Evergrande Goes Bankrupt: Why is it Important for the Bitcoin and Crypto Market?

• The bankruptcy application of China-based real estate giant Evergrande has caused significant declines in major digital assets, echoing in the crypto markets.
• Evergrande, a leading real estate developer in China, has recently become a prominent representation of China’s property crisis. On August 17, Evergrande sought refuge by applying for Chapter 15 of the US bankruptcy law to protect itself from creditors.
• Evergrande’s subsidiary, Tianji Holdings, also took a similar step in the Manhattan bankruptcy court. This development highlights concerns that the weakness in China’s property sector could spill over into other areas of the economy.

The bankruptcy application of Chinese real estate giant Evergrande has shocked the crypto market and raised concerns due to its connection with Tether.

Real Estate Giant Evergrande Files for Bankruptcy

The bankruptcy application of China-based real estate giant Evergrande has caused significant declines in major digital assets and cast a shadow over Tether’s financial support.

Once a leading real estate developer in China, Evergrande has recently become a prominent representation of China’s property crisis. On August 17, Evergrande sought refuge by applying for Chapter 15 of the US bankruptcy law to protect itself from creditors. This provision offers protection to foreign companies during restructuring and keeps creditors at bay.

Evergrande’s subsidiary, Tianji Holdings, also took a similar step in the Manhattan bankruptcy court. This development highlights concerns that the weakness in China’s property sector could spill over into other areas of the economy. Evergrande’s $330 billion liabilities and the bankruptcy experienced in late 2021 triggered a chain reaction.

Companies responsible for 40% of home sales in China went bankrupt due to the debt crisis that emerged in mid-2021. This left a bleak landscape filled with thousands of unfinished homes and shaken investors.

Evergrande is not only folding its cards. Discussions on restructuring are ongoing in Hong Kong, the Cayman Islands, and the British Virgin Islands. Creditors may soon vote on a restructuring plan with the possible approval of Hong Kong and British Virgin Islands courts in early September.

Reaction of the Crypto Market

The news of Evergrande’s bankruptcy application created shockwaves in the crypto market. Bitcoin (BTC) fell by 7% in the past 24 hours, dropping below $26,000. Some attribute Bitcoin’s sudden drop to a viral event claiming that Elon Musk sold all of SpaceX’s $373 million worth of Bitcoin.

Meanwhile, Ethereum (ETH) also experienced a similar drop, trading at $1,686 at the time of writing this article. The crash was not limited to Bitcoin and Ethereum alone. Ripple (XRP) fell by 14%, Litecoin (LTC) fell by 13%, and Shiba Inu (SHIB) fell by 8%.

Furthermore, the recent increase in Bitcoin due to institutional interest seems to have halted due to the slow approach of the SEC, which delays the approval of a Bitcoin ETF.

Tether’s Exposure to China’s Debt

Tether (USDT), one of the leading stablecoins in the crypto market, was overshadowed by the Evergrande crisis. The complexity of Tether’s asset backing and its potential exposure to the Chinese financial system make it the focus of attention and concern.

Tether’s backing traditionally consisted of fiat currency reserves such as the US Dollar. However, over time, the composition changed to include other assets such as commercial paper.

A report in mid-2021 revealed that nearly 50% of Tether’s backing came from commercial paper, which was short-term, unsecured debt securities issued by companies.

Tether quickly clarified that it had no direct connection to Evergrande’s debt, but the specific details of the commercial paper in Tether’s reserves were not disclosed. Concerns arise from the possibility that commercial papers issued by Chinese companies could still be part of Tether’s reserves, indirectly tying Tether to China’s overall economic situation.

Evergrande’s bankruptcy and the general uncertainty in China’s real estate and corporate sector could affect the value and stability of Tether. If Tether holds a significant portion of such papers, questions may arise about the valuation and stability of the stablecoin.

What to Expect in the Future?

Evergrande’s restructuring and its effects spreading across different sectors require a cautious approach. Investors, regulators, and market participants should manage uncertainty carefully, with foresight and readiness for sudden changes.

The shock resulting from Evergrande’s situation vividly reminds us of the vulnerability and interconnectedness of global financial markets. The crypto world should be prepared for more volatility in an environment where traditional financial problems can turn into digital asset price fluctuations.

Expect analysts and regulators to scrutinize their exposure to world markets and their compliance with financial standards more closely, especially for Tether and similar stablecoins. The Evergrande incident could be a catalyst for tighter regulation.