#43 Evergrande
#43 Evergrande
Broader markets tumble with Evergrande at the center of bearish sentiment.
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Is Crypto Safe?
Many have never even heard of Tether or USD Coin, and if they have they don’t know exactly how they work. Both are stablecoins, cryptocurrencies that are designed to hold a peg to the US dollar. At its creation Tether was claimed to be one to one backed by dollars. However, this is an unsustainable business having $60billion in unproductive cash. Just recently, Tether has released a report showing that only a small % of its holding are cash and majority %70+ are in the form of commercial paper and many worry this commercial paper is Chinese companies.
Why does this matter for Crypto? Tether is responsible for nearly half of all of the crypto volume, and touts an impressive $69billion USD market cap. Because Tether is backed by commercial paper then it comes with a credit risk. If the commercial paper backing Tether devalues by a large percentage this could cause panic for investors using Tether.
If you haven’t heard yet, Evergrande, China’s third largest issuer of commercial paper just lost over 85% of its equity value when investors found out the company has been cooking its books. They had been failing to record losses and showed in their records that they were holding massive amounts of assets that no longer exists, or were no longer worth what was recorded. Essentially, they were insolvent.
Was Tether holding Evergrande commercial paper? Tether has recently stated that is does not hold Evergrande commercial paper. However, many have warned that Evergrande’s defaulting could have wider impacts on the commercial paper market, and others fear there are more large companies in the shadows with bad books waiting to be recognized as insolvent. This means there is a larger than zero chance that (undisclosed) commercial paper that Tether is holding is downgraded and the $69billion cryptocurrency is not actually backed by $69 billion in assets. What would the implications be for Tether and Crypto?
One possible situation is nothing happens to Tether, as investors simply ignore the underlying credit risk for now. Another outcome is this situation pushes Bitcoin to new all times highs. What could happen is since investors have no way to cash out their Tether for real world fiat they may look to Crypto currencies deemed safe, and the safest is Bitcoin. Rather than cashing out their Tether investors with large amounts of Tether may start buying large quantities of Bitcoin if they believe Bitcoin’s price will remain more stable over time than Tether. No matter what happens you can expect increased volatility in the coming weeks.
Currently, there is a shock through the markets. The S&P 500 is down -1.76% premarket and Bitcoin is down -10% over night. There is a clear move into cash going on regardless of the reasons.
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