Recently, there has been a selling pressure on both global markets and Bitcoin. A major correction is expected before the end of this year for emerging markets for a long time. One of the reasons is that the current policies of the FED have started to change and the other is the bankruptcy of Evergrande, which has recently erupted.
These two problems have started to be priced in the markets for now. However, neither issue was fully priced in. Therefore, there is a risk that the decline in the markets will continue and evolve into a major correction.
Evergrande Bankruptcy and Tether Claim
First of all, I would like to touch on the developments regarding Evergrande. Evergrande is China’s huge real estate company. The company has recently been grappling with high indebtedness and insufficient liquidity. However, he could not solve his problem and declared that he could not pay his debts.
Credit rating agencies noticed this problem and updated its rating to “could default” (bankruptcy). Ultimately, it did. However, the debt burden Evergrande left behind is $300 billion. It has debts to more than 120 banks and again more than 120 non-banking institutions.
This is a fairly large amount of debt. $300 billion is the entire GDP of countries like Ireland, Denmark, Hong Kong or Portugal. And the debt here is just one company left behind. We know that debt interests in China’s real estate sector are increasing rapidly. Sales dominated the real estate sector stocks. Below you can see how Evergrande stocks crashed.
Even companies other than Evergrande have such hard sales. I have put the graph of SINIC, another company that has a liquidation problem, below. Its price crashed with a sharp 86% drop.
These huge companies can make a huge impact as they deal with huge projects. Evergrande does not only build buildings, but also builds a huge city, i.e. large projects including 100 thousands of residences. It has thousands of workers and customers. Because their customers and workers could not get their money, they started protesting.
It can spread to the world
In the bankruptcy of such huge companies, a problem called financial contagion arises. The crisis that we call the 2008 crisis emerged in the history of Lehman Brothers’ bankruptcy. The problem spread to all sectors and the world, as the bank went bankrupt and could not pay its huge debt. All world markets crashed hard.
However, because the bankruptcy of Lehman Brothers was sudden, it had a huge impact and spread quickly. For this reason, some say that the problem can be resolved before it spreads, as Evergrande’s bankruptcy is known early. But there are some incomprehensible parts here.
First, these financial contagions spread just like Covid-19. Every company takes its lenders with it when it goes bankrupt. As financial markets begin to be priced negatively, these companies become unable to borrow money and a big wave comes. If you remember, we were aware of such a thing before Covid-19 came to our country. However, there’s no point in knowing when you don’t have a solution.
Secondly, China’s economic and political structure is not like Europe or America. So, if the same problem were in America, it would probably take over the debt and bypass the problem. However, China will likely give a helping hand to aggrieved customers and workers. It will not pay outside lenders to shareholders or bondholders. So, it probably won’t be a complete recovery as we understand it.
The Entire Crypto Market Could Crack!
Evergrande news has had a negative impact on the markets so far. If the news does not stop, the markets may continue with negative pricing. However, there is another special problem that concerns the cryptocurrency market. The problem is that Tether cannot repay the loan it has given because Tether has Evergrande debt securities and cannot pay its debts at Evergrande.
Tether maintains a reserve (reserve) for the USDTs it holds. However, the majority of these reserves are “commercial paper” (debt, stock etc.) as Tether disclosed. However, he did not say who these commercial papers belong to.
If Evergrande stock is holding, it means Tether’s reserves will melt and USDT will lose its current fixed price to the Dollar. Considering that 80% of the transactions in the market are made with USDT, it seems to bring a great destruction. Tether is said to hold some “commercial paper” from China, even though Evergrande does not hold debt securities. If that’s the case, when things get bad in China, Tether may still be unable to get back the loan it owed.
So, Tether is a ticking time bomb right now. He doesn’t do enough to dispel any doubts about the subject. There is already a risk of the problem spreading globally. In this case, cryptos will be affected again. However, if there is news about Tether, there is a risk of negative divergence from other markets and a historical decline.
FED Meeting Stresses Markets
The second issue is about the Fed. On the 24th of this month, Powell will announce the Fed’s decision. Earlier, it had signaled that they would start reducing their asset purchases this year. However, there is no clarity on when it will start. Here on the 24th, the calendar is expected to become clear.
In other words, it will be the first step of the return from the expansionary monetary policy, which has created great increases in asset prices until now. In this respect, it created a negative pricing in the markets again. If an optimistic speech comes, where a clear time is not given by the FED, the markets may be more optimistic for a while.
However, as I said, a major correction is expected within this year. Because the US indices still have not entered a strong correction.
Another problem with the current monetary policy of the FED is that it will not be able to intervene in a new global crisis (debt crisis, Evergrande, a new virus mutant). Because he already did the last thing he could do. It flooded the markets with liquidity with “0” interest and asset purchases.
After that, in order to intervene, he must first raise the interest rates so that he can intervene by lowering them again.
In summary, the markets are swimming in liquidity with almost “0” interest rates and asset purchases made every month. They are in the best condition possible. However, this is the biggest risk. When you are at your best, the changes that follow will have a negative impact. Due to the high liquidity, the markets were dancing and the music was turned up to the fullest. However, now the voices of risks are starting to become audible.
These risks are the reason for the current and current sales for Bitcoin. For this reason, it is important not to enter big positions before the uncertainties are lifted. It is more important to minimize the risks by trading with a stop. In addition, it is necessary to follow the news about Tether closely. Bad news spreads fast. However, it is priced until it reaches you.
I’m Furkan Bozkurt. I thank you for your patience.
Yes, my friends, there is a sale in the market. What are your reasons for this? Is it a temporary situation? You may want to know these. For this reason, I made a detailed analysis. Firstly, $BTCLet’s take a technical look at the situation in . Then we will look at what is happening in the world. #BTC
— Furkan Bozkurt (@BzkrtFrkn) September 20, 2021
Disclaimer: What is written here is not investment advice. Cryptocurrency investments are high-risk investments. Every investment decision is under the individual’s own responsibility. Finally, Koinfinans and the author of this content cannot be held responsible for personal investment decisions.