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How The Evergrande Situation In China Could Impact Bitcoin

account_balanceMetro News account_circleJames Lopes chat_bubble_outline0 Comments

Evergrande. It is probably a name you never heard before September 2021, but you haven’t stopped hearing in the news since. If you pay attention to financial markets at all, then you might even fear the implications of what could happen if the Chinese real estate company defaults on its debts.

It has caused the stock market to crash the largest since prior to last year’s US Presidential election, and one of the largest corrections since Black Thursday in 2020 at the onset of Covid. Could what’s going on in China’s capital market be the straw that breaks the camel’s back in terms of the global economy, and how does all of this involve Bitcoin?

In September 2008, Lehman Brothers Holdings Inc. filed for Chapter 11 bankruptcy. Previously, it was the 4th largest investment bank in the United States, behind only Goldman Sachs, Morgan Stanley, and Merrill Lynch. The company’s 150 years of success came to an end due to its involvement in the subprime mortgage crisis, which prompted The Great Recession. 

The stock market saw its worst selloff in decades, and the economy, jobs, and production all suffered. That year was also the year Bitcoin was created, which we’ll return to later.

Explaining China’s Lehman Brothers Moment

Now, some thirteen years later, China is facing its potential “Lehman Brothers moment” with the second-largest real estate firm in the country, Evergrande. “Grand” is an understatement to how frightening the situation is, with the real-estate firm being the “Earth’s most heavily indebted.” Making matters worse, the company told banks it won’t be able to meet its interest payments due on its loans. This suggests the company is at risk of a full default on its debt, which could have catastrophic implications on the entire economy due to how much money is at stake and tied up in Evergrande contracts.

Last year, Beijing reduced the amount of debt real estate developers of such magnitude could owe, perhaps seeing the writing on the wall. Evergrande’s market cap ballooned to $50 billion, but its debt grew faster to the tune of $305 billion. One estimate suggests that up to two-thirds of liabilities – monies owed – could be cash that individuals and contractors put down for new home construction.

What this also means is that a lot of investors will be out of money, possibly homes, and there are likely hundreds of other businesses involved in the ongoing liquidity crisis. This has caused Evergrande shares to fall by 85% since the start of the year, adding to woes around the company’s crisis.

The Birth Of Quantitative Easing And Bitcoin

So, how does this all affect Bitcoin? If you recall, Bitcoin was created during the Great Recession during the Lehman Brothers collapse. To save the economy, quantitative easing began. 

According to Wikipedia, “quantitative easing is a monetary policy whereby a central bank purchases predetermined amounts of government bonds or other financial assets in order to inject money into the economy to expand economic activity.”

It worked, the economy was saved, and the stock market recovered to new highs we are still seeing today. When Covid hit, more economic activity was stimulated by injecting more money into markets. It again worked like a charm and the stock market hit new highs. With Evergrande here and so soon after Covid and with an economy on thin ice, there is potential for another recession – or worse, a depression.

In response to Evergrande, China has already chosen to inject $18.6 billion into the banking system to protect it from an economic crisis. Compared to the trillions pumped into markets for the pandemic, it might not be enough. And, given how weak the economy is currently and the job market in particular, how much further can this go on for?

Bitcoin Becomes Legal Tender As Evergrande Puts Economy At Risk

Elsewhere in the world, a movement is happening. In El Salvador, Bitcoin has been adopted as legal tender for the first time in a move to avoid issues like what’s going on in China, and what has happened in the past and will happen again in America.

Bitcoin works opposite quantitative easing policies, by keeping supply scarce and hard capped at 21 million, and by following an issuance schedule that diminishes over time. As the value of fiat currencies falls, the price per BTC climbs in perpetuity due to its mathematical design.

Governments are only now seeking to damage the cryptocurrency. In the United States, the SEC and other regulators are tackling via policy, as they tend to do best. While in China, the government has outright banned Bitcoin mining, which has caused a bearish phrase in the cryptocurrency’s bull trend.

Most of where Bitcoin was centralized is now gone, and this could have been due to Evergrande itself. Historically, governments have been known to limit the ownership of gold when fiat currencies begin to struggle. China could have been preemptively crushing crypto, in hopes to prevent an exodus from the yuan into BTC.

Prepare For Anything That Happens In Markets With PrimeXBT

But despite the selloff in crypto due to China FUD, Bitcoin is back and climbing, and if the economy collapses, it will be time to prove itself as a safe haven asset once and for all. It has initially been behaving as a risk asset falling worse than the stock market in response to Evergrande, which could suggest that rather than focusing on crypto, gold trading via CFDs might be a better alternative. 

Before Bitcoin, gold was long the best monetary standard, and still could be despite the digital gold narrative. This will all be decided soon enough, as the fate of what is to come with the Evergrande situation is still ahead. Can more money printing save the economy from the real estate firm’s collapse, or will it be Bitcoin or gold instead. Whatever the case may be, traders can prepare with PrimeXBT long and short positions on Bitcoin, gold, stock indices, oil, and more, all from a single account.

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