Panic! At the Crypto … What Just Happened to the Crypto Markets?

What Just Happened to the Crypto Markets?

Rough day for anybody holding crypto. Yesterday morning, BTC could be purchased for around $48K. As of 7:30 PM Eastern Standard Time, that same BTC was available for a shade over $40,000. While it has rebounded a bit (currently over $42,000) for a few minutes you could have grabbed BTC at a 20% discount from its price less than 48 hours prior. This has been a bloodening and not just for Bitcoin but for virtually all cryptocurrencies. Solana, Ethereum and Polka Dot have lost >15% since Sunday as have so many other alt-coins.

What Caused the Crash in Crypto?

Short answer? A Chinese property developer is about to miss some payments. The reality is that the answer is quite complex. It centers around one Chinese company, Evergrande, that owes around $300 billion in debt, roughly around 38% of the current market cap of Bitcoin. The company owes so much debt that it recently demanded that its own employees loan the company cash! Truth be told, that’s not the big issue. It’s all of the companies that are in the same financial ecosystem as Evergrande. Many companies around the world have exposure to Evergrande. As positions unwind and parties are not repaid, this spreads into a “contagion” that affects most markets. Those of us who remember the events of August through September 2008 (when Lehman Brothers bankruptcy kickstarted the Great Recession) understand just how quickly market contagion can occur.

What Does Evergrande Have to Do With Crypto?

Indirectly, this could have a serious impact on crypto markets. As debt payments go unpaid, a domino effect could potentially take place. Some of the financial companies that need to cover positions will sell off their assets to do so, meaning stocks, gold and cryptocurrencies. For an analogy, let’s say your car broke down and you needed to buy another car. You might not have enough cash, but you have crypto. You don’t want to sell your crypto, but your car is a necessity.. So you sell your crypto and purchase a car. Easy enough to visualize? Now picture large financial institutions selling tens millions of dollars of crypto simultaneously to cover their positions.. The mere threat of that event could cause a selloff in the crypto markets.

When will Crypto Prices Stabilize?

A few things could happen here. First and most likely scenario, the Chinese government offers to serve as a backstop against Evergrande infecting the world’s economy. Or, the Chinese government could just let the chips fall as they may. If that’s the case, it will be very interesting to see what happens when a company that is deemed too big to fail actually fails! Remember back in 2008, the U.S. Government refused to allow several banks to just go quietly into the night. They bailed them out at taxpayers expense. China’s next move will either give the markets a boost or send us into uncharted waters.

Should I Sell My Crypto Now?

This is not to be construed as financial advice, but right now, the markets are down some 15%. Can the markets go lower? Sure. But they can also bounce back, even to previous levels. A bounce back could happen swiftly, especially if the Chinese government were to begin printing money or promise to bail out Evergrande. At this point, timing the market seems kind of futile. If you haven’t sold just yet, a wait-and-see approach may be the best move. Our crypto investing time horizon is long term, so we are likely to continue to HODL and wait this one out.

-Crypto Trend Advisers

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