A Rough Start To The Week For Crypto Following Evergrande Worries
Cryptocurrencies have been left to pick up the pieces on September 21 after prices plunged on Monday. The price plunge came after concerns over the spillover risk to the global economy from Evergrande’s troubles rippled into wider markets. Bitcoin tumbled by almost 10 per cent on Monday to $40,000, its lowest price since August 7.
Bitcoin managed to recover slightly on Tuesday, reaching $43,000. This price drop comes after Bitcoin hit a recent 4-month high, above $52,000 on September 6. Monday also saw the price of Ether, the coin linked to Ethereum, fall by more than 10 per cent, below $3000, for the first time since the beginning of August. By Tuesday, the price of Ether had recovered by 1 per cent to $3012.
Evergrande fears spark troubles
The rough start to the week came after fears that Evergrandes troubles could lead to fallout for the Chinese and global economies. These worries prompted a selloff in riskier assets. Evergrande is a real estate firm that currently owns more than 1300 projects in over 280 cities across China. The firm has recently expanded to become one of China’s largest companies by borrowing more than $300 billion, making it one of the most indebted companies in the world.
Last year, Beijing brought in rules to limit the amount that can be owned by large firms. This prompted Evergrande to sell its projects at major discounts to ensure that money was coming in to pay off their debts and keep the company afloat. Evergrande is now struggling to meet the interest payments of its debts.
Many industry experts fear that Evergrande’s collapse could impact the Chinese financial system. According to the Economist Intelligence Unit’s (EIU) Mattie Bekink, “ Evergrande reportedly owes money to around 171 domestic banks and 121 other financial firms.” If the firm defaults, banks and other lends may be forced to lend less. This could lead to a major credit crunch, making it difficult for companies to borrow money at affordable rates.
If companies struggle to borrow money, they may find it difficult to grow which would be detrimental for the world’s second-largest economy. These worries may spark caution within foreign investors, who may be discouraged to place investments in Chinese firms.
There have been debates as to whether Beijing will step in to rescue the company however according to Matthew Dibb, chief operating officer at crypto index fund provider Stack Funds, “We can’t take a very positive view just as yet until we get through the next few days.” Adding that, “it would be better to wait on the sidelines as crypto markets will continue to be affected by the contagion.”
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