The empire strikes back. Last week China was again in the front and center of crypto with two macro news that had a powerful (though temporary) effect on crypto. Evergrande’s fall and a(nother) ban on anything that smells like crypto.
Evergrande is the Chinese real estate behemoth whose fall is sending shockwaves through the whole financial system. Its crisis could become a Chinese version of the 2008 Lehmann Brothers. The company reportedly owes immense amounts of money to around 171 domestic banks and 121 other financial firms. And it is probably never going to pay unless the Chinese government does some of its magic and avoids the credit crunch.
The event is being widely reported (read about it on the BBC news site or a wonderful Twitter thread from Mira Christanto, a researcher at Messari), but what's interesting to us is how this affects crypto.
One of the most appealing features of crypto was its low correlation with more traditional assets. Institutional investors pointed at this as one of the reasons to believe in crypto, according to Fidelity Digital Assets’ 2021 Institutional Investor Digital Assets Study. But what we have witnessed these days says otherwise.
Crypto is increasingly intertwined with traditional finance. More investors from TradFi are approaching crypto. And with tokens being a very liquid type of asset, it is reasonable to think that in times of crisis, fear hits fast. Investment funds might also have to balance their risk profiles after the real estate crisis in China, and crypto-assets are an easy target there.
When the effect from the Evergrande crisis started to cool down, the Chinese government made a stellar appearance and banned crypto…again.
This is not the first time, and funnily enough, it will probably not be the last. The Chinese powers are strongly prosecuting crypto. The hardest blow came halfway through 2021, when the Chinese administration chased most miners out, creating an exodus that took crypto to a bearish trend. This time the announcement was sent out by the People’s Bank of China and just added a few details to the well-known official position, like specific mentions to Tether. But apart from that, things remain fundamentally the same. The announcement seems to be tied to the progress of the official Central Bank Digital Currency. China has been fast implementing a government-issued, government-supervised, government-surveilled, digital currency, and they probably want nothing to stand in the way.
Bitcoin both times went on a dip: once for the Evergrande’s threat, again when news from China broke. But things seem to be getting back to normal already. Crypto has proved great resiliency in the past, and fundamentals and on-chain metrics remain strong, indicating that we are very likely to be back on our feet soon.