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Identifying Worm Holes and Asteroids in the Cryptoverse
Evergrande's default on Sept 20 has the possibility of being like a huge asteroid on the cryptosphere
The most important up and coming event I see it, which is the equivalent of a large asteroid landing on the cryptosphere is Evergrande defaulting on Sept. 20th. 2021. Evergrande is a massive Chinese property developer. They were at the forefront of the countries real estate explosion and have been responsible for over 1,300 real estate projects. Most of their growth has been funded by mountains of debt - $300 billion to be exact.
The company essentially over leveraged itself in a time when the value of its assets (property) was always increasing.
This is systemic, because property is seen as such as the quintessential asset for the Chinese. For many, it is their primary investment assets, and, despite how far China has come, most Chinese citizens neither have the education or exposure to other forms of investments.
Given that Evergrande has built up so much debt, and that property sales have waned, they are going to have to sell assets that they already own. These are developments that are not completed etc. This selling pressure could lead to a fall in home prices , which therefore, could lead to further fire sales. This is especially the case when you consider that there are many more developers just like Evergrande are burdened by heavy debt loads.
Much like we have seen with futures liquidations in crypto, as the value of equity (in this case houses) falls, further liquidations are required.
From a socio-economic impact, falling house prices could be a disaster for all people in China, who have tied their wealth to their properties. However, that isn't the main concern with Evergrande: it’s the meteoric impact this could have on the broader Chinese credit markets - and the world.
Currently, there are rumours that Evergrande does not even have enough capital on hand to service even just the interest on this debt. If they can't meet interest payments, they are in technical default. Some would have thought that the Chinese government would bail it out, however, they would be reluctant to do this especially as they have been trying to clamp down on excessive leverage in the real estate sector.
So, if there is no bailout, there will be a default.
Evergrande debt is held by numerous international banks across the world. They would all be exposed in a default. They would have to take massive cuts and losses. It's not only Evergrande though, the commercial paper of other Chinese developers will also tank in value as the property crisis widens.
There is also the risk that this spreads beyond just Chinese developers to Chinese banks and mortgage lenders. If the Chinese government needs to fight this economic contagion, they are going to start selling off some of their external assets. It's worth pointing out that they hold at *least 15%* of all the outstanding global debt.
Sales of this debt could have massive implications for their valuations on the balance sheets of nearly every financial institution in the world.
The equity markets will be next in line. Not only will investors sell shares of those banks and companies that are exposed, but funds that are looking to cut losses on the debt may sell their portfolios.
Of course, all of this is a highly simplified explanation. There is so much going on behind and that's why I want to do a dedicated video on it.
The main question you are no doubt asking is: What does this mean for crypto?
Crypto owned by China would potentially be sold off as it is considered one of the riskiest assets, and therefore sold off first. It could also mean that the Chinese market could liquidate its position in the US bond market, who knows what would happen then? Saudi Arabia selling off their bonds too?
Alternatively, the Chinese could bail out Everglade and crypto won’t tumble on in value on Sept 20th.
What’s your opinoin?