The sudden drop in cryptocurrency prices and the overall market drawdown certainly demand an explanation. And while many analysts were quick to link the events with what’s happening in China, we may also be able to suggest some alternative reasons.
On September 20, Bitcoin’s updated monthly low fell below $ 42,500. In just a day, the asset lost almost 9% of its value and continued to decline. The price of most other crypto coins also collapsed, in many cases more significantly than for the BTC.
Analysts were quick to link the downfall of the crypto market to the problems in China. And for a good reason, as the country is heading towards the entire housing market collapsing and bringing the Chinese banks down with it. Last week, China’s largest real estate developer, Evergrande, reported severe liquidity problems and announced the recruitment of debt restructuring consultants. The developer is late on bank loan repayments, as well as payments to suppliers and investors. We learned over the weekend that it began repaying wealth product investors with real estate (which in China is currently completely illiquid).
Evergrande has the largest total debt among developers worldwide, estimated by UBS at $ 313 billion, about 6.5% of the combined debt of all Chinese real estate companies. At the same time, the Chinese authorities are in no hurry to intervene in the situation around Evergrande. State newspaper Global Times wrote that the company shouldn’t expect government assistance.
UBS analysts believe Evergrande’s default is imminent. It’s hard to predict the consequences of such an event. In addition to Evergrande real estate investors potentially losing their funds, the company defaulting could bring about the bankruptcy of multiple contractors and suppliers. Most importantly, the same applies to the banks, which, obeying the directives of the Chinese government, have for years been readily lending to developers.
Evergrande shares fell another 12% to their 11-year low, following a 19% drop the day before. Along with Evergrande, the Chinese developer Sinic Holdings Group Co. plummeted the hardest, losing 87% of its value in just one day.
Hang Seng, the main index of the Hong Kong stock exchange, also declined 3.5%. Investors en masse are selling their shares in Hong Kong real estate companies. In particular, the leading Hong Kong development firms Henderson Land and Sun Hung Kai Properties Ltd. went down by 13% and 10%, respectively, hitting their lowest point since 2012. Chinese insurance company Ping An Insurance lost 5.8% of its share price due to the fact that 4.9% of its portfolio is real estate investments. This is what “the domino effect” looks like …
Evergrande owes money to 171 Chinese banks and 121 financial companies, and its default could lead to a significant reduction in lending for the entire country. As a result, companies won’t be able to raise funds at affordable rates, and foreign investment will decline.
Deposits in Chinese banks amount to $ 35 trillion, more than double that in the United States. So any Chinese financial crisis will lead to unforeseen circumstances that will surely affect all global markets. In fact, it is already happening: stock indices and cryptocurrency quotes have begun to fall.
However, something is not right here. Previously, cryptocurrencies seem to have been a haven of capital during periods of market volatility. When stocks fall, investors usually turn to gold and bitcoin. But now, the stock and cryptocurrency markets have fallen simultaneously, which means some other factors are at play.
One such factor might be the unprecedented jump in gas prices in Europe due to the ongoing negotiations with Russia’s Gazprom. For the first time in history, prices per thousand cubic meters of gas on the European market reached $ 900, a drastic increase from $ 200-250 not that long ago. And even though this is a temporary phenomenon, there is a likely correlation between the energy crisis in Europe and crypto quotes.
As a result of the gas rally, a lot of speculative capital could have moved from cryptocurrencies to the shares of natural gas companies, which are now showing positive dynamics, as well as to the futures speculation market. Given the high volatility of cryptocurrencies, people typically don’t use them to keep their savings, rather as a tool for increasing capital. Therefore, the money can at any point be transferred from crypto to another asset that suddenly starts trending upwards.
Gas is now viewed as a relatively environmentally friendly alternative to coal in thermal generation. Thermal power stations in Europe are still working with might and main, but the harsh conditions of “green transition” are forcing coal-fired power plants to switch to natural gas. This drives up the demand for gas and, in the future, will increase the EU’s dependence on gas imports.
As a consequence, investors’ money is coming back to the energy sector. Back in the winter and spring of 2021, its growth was caused by rising oil prices. It is now powered by a surge in gas cost and the expected oil price per barrel staying within the $ 75-80 range.
Another pressure factor on the market is the expectation that the United States will stop the massive infusion of money into its economy and finally raise the corporate tax. The growth of the stock and cryptocurrency markets throughout the last year (and even further back) was brought about by generous “COVID” stimuli. The American authorities simply “poured cash” onto the coronacrisis, with a significant portion of this money then going into stock and cryptocurrency investments.
Biden’s new $ 3.5 trillion plan is meant to not only make the American economy greener and more socially just (in the way the American Democrats understand it) but also to balance the budget over the next ten years. Consequently, it assumes a $ 3.5 trillion increase in tax revenues.
So higher taxes are on their way. Biden has already agreed to a 25% corporate tax, and it might not be the ceiling. (Don’t forget that in 1968 the US corporate tax was 52.8%, against the background of a rapidly growing economy.) Capital gains and income taxes on the country’s wealthiest citizens should also go up.
In addition, Congress is discussing the introduction of a tax on corporate stock buybacks. Proceeds from it could amount to $ 70- $ 80 billion a year, becoming the largest source of replenishment for the US budget. At the same time, it would be the biggest threat to further stock market growth.
But stocks are one thing; what about cryptocurrencies? Yes, they will also cease their growth if the budget pumping of the economy stops. However, a more plausible reason for their current decline is that the exchange value of crypto has gotten too far away from its real value.
The question then is how to calculate the real value. The issue is too intriguing to ignore, and we will definitely get back to it next time.