Investors unnerved by the financial strains of a Chinese real estate firm sent cryptocurrencies reeling on Monday, with Bitcoin and other coins tumbling by more than 10%. Although the ultra-scarce cryptocurrency is claimed to be a hedge against catastrophic economic events, there is no telling how the volatile asset could react when it does finally arrive.
With the stock market on shaky ground and precious metals melting down further, is the top cryptocurrency and the rest of its altcoin brethren about to experience a bleed out similar to Black Thursday? Or is this just a shakeout using nervous market sentiment over what ends up being a non-event?
As risk-sensitive assets plunged, the leading digital coin shed over $3,000, changing hands just below $44,000 in midday trading. The moves were the latest signal that the world’s largest cryptocurrency hasn’t achieved the “safe haven” asset status that some of its more ardent proponents have promoted, even as debt levels around the world surge in response to COVID-19.
With the virus still dominating investor concerns, markets were jolted by news of Evergrande, a major Chinese real estate company that’s teetering on the brink of default. China’s potentially slowing economy, and Beijing’s aggressive actions against key business sectors, have converged with worries about the global economy. Meanwhile, a fight is brewing in Washington over raising the U.S. debt limit.
The spillover effects were apparent across the crypto world. According to CoinmarketCap, top payment networks such as Ethereum (ETH), Cardano (ADA), Binance Coin (BNB), and Solana (SOL1) have all sustained even deeper losses than Bitcoin in the past 24 hours: all were off by at least 8% on the day.
According to blockchain analytics platform Glassnode, the 7-day moving average for the number of Bitcoin wallet addresses sending money to crypto exchanges has reached a 3-month high, signaling to intensify selling pressure and speculative trading.
Given the fees associated with moving crypto on and off most centralized crypto exchanges, this rising flow volume to exchanges is one indicator that BTC holders could be looking to sell. Meanwhile, the overall balance of crypto on exchanges continues to decline this week.
Though the value of BTC is often described as digital gold, acting as a store of value asset that doesn’t correlate with the stock market, its price decline in the last 24 hours shows signs that the Bitcoin price today is responding to the risk tolerance of investors.
Bitcoin price has already recovered more than $1,000 since the bell rang at the official Monday morning market open. The forceful selloff started overnight after the weekly close, potentially due to stock market weakness.
The macro-environment is on shaky ground considering a potentially catastrophic default of China’s second-largest real estate developer, Evergrande. The default has Lehman Brothers-type implications, enough to cause a domino effect and potential economic collapse and recession.
The Dow Jones fell 1.87% during the same 24-hour period as Bitcoin’s 10% collapse, but given cryptocurrency’s notorious volatility, the two situations are of similar magnitude. Normally stable metals have also suffered furthering the extended macro madness.
The Evergrande situation could ultimately turn into another scenario where an unprecedented amount of fiat currency is essentially printed to cover the debts the real estate giant can’t cover.
These bailouts saved the stock market and the economy back then, and the strategy was used again to combat COVID. Can the economy withstand another flood of capital? Or will central banks and governments be forced to step in and let it all come crashing down? Most importantly, how does Bitcoin perform in any of the above scenarios?
Nik Bhatia, a crypto watcher and author of the macroeconomics focused cryptocurrency book, “Layered Money,” flagged Bitcoin’s tight link to risk assets in his newsletter last Friday, saying the digital coin has “battled a narrative of equity-market correlation.”
Pointing to its correlation with the pandemic-driven stock market crash in March 2020, Bhatia said that “Bitcoin responds to the global macro-environment and is itself a product of it.”
Pete Humiston, a manager working on the market intelligence side of the crypto exchange, Kraken, said Bitcoin is “an emerging store of value” that’s much more volatile than equities. However, “it does have a tendency to be strongly correlated with stock from time to time.”