VYSYN Ventures Weekly Insights #67 — Chinese real estate giant’s debt situation sows investor panic
China is experiencing its Lehman Brothers moment as troubled real estate developer Evergrande Group makes global headlines. Based in Shenzhen, the company is a part of the Global 500, which makes it one of the largest corporations in the world, and is currently tied to a global equities selloff.
Bitcoin prices crashed alongside traditional assets as investors likely scrambled to convert their high-risk assets into cash as the stock market tumbled. In the latest VYSYN Release, we examine Evergrande’s situation and the impact this development had on the equities and cryptocurrency markets.
Evergrande debt triggers global selloff
Evergrande Group is a Shenzhen-based Chinese real estate developer. Founded in 2006, Evergrande boasted a peak market capitalization of $23.9 billion. It also claimed to own more than 1,300 projects across 280 cities in China. The company diversified its investments in electric vehicles, bottled water plants, sports teams, and dairy products.
Fueling this growth was a mountain of debt that some experts believe to be more than $300 billion. Steady cash flow allowed the company to service its debt, but as the Chinese economy struggled in early 2021, Evergrande struggled to meet its debt obligations. Over the past few weeks, the company warned investors it would struggle to make interest payments and planned on selling its assets to raise cash.
This plan didn’t pan out as competitors sensed panic in the company’s actions and refused to pay fair market prices. The company announced last week that it had settled payment terms with the Shenzhen Stock Exchange on a $36 million loan but refused to elaborate on its plans to settle a $83 million bond due this week.
Rising debt levels on Chinese balance sheets was a perpetual concern for investors worldwide. Last year, a raft of Chinese-state owned companies defaulted on their debt, throwing global recovery hopes into question. In 2018, conglomerate Dalian Wanda was forced to downsize by the government as its debt levels became unmanageable.
Thanks to these prior events, Evergrande’s news was the perfect catalyst for a global market selloff. The S&P 500 fell by 1.7% following the announcement, in what was its worst daily performance since May 2021. Hong Kong’s Hang Seng index was also impacted as it fell by 4%.
Talk of another Lehman Brothers-like collapse that would trigger a global recession was rife in the markets. Curiously, as the prices of traditional assets fell across the world, Bitcoin and cryptocurrency prices fell too.
Bitcoin and cryptocurrencies mimic equities
Cryptocurrencies have sometimes gained value when mainstream financial assets have experienced trouble. Some turn to the assets as hedges against traditional assets as their decentralized nature and fixed supply schedules can make them attractive in times of economic turmoil. However, they are still considered a high-risk asset, which means they are alsos subject to sell-offs when risk appetites wane.
Bitcoin fell below $42,000 for the first time since the first week of August eventually falling below $40,000. Ethereum dropped from over $3,400 to just above $2,600, during the same period. The entire cryptocurrency market experienced a similar fallout. Other top altcoins like Cardano, XRP, Polkadot, Doge mirrored the fall in Bitcoin and Ethereum prices.
This behavior represents a turning point in the way cryptocurrencies are viewed. Greater mainstream adoption has pushed cryptocurrencies from the fringes of the investment world towards the center. As a result, financial institutions are now incorporating them as a part of their broader portfolios.
During global selloffs, portfolio managers cut risk across the board and given their historic volatility, cryptocurrencies were the first in line to be liquidated. While they are great portfolio hedges, they don’t function as well during times of extreme crisis such as the one perpetuated by Evergrande.
Edward Moya, senior market analyst of the Americas at Oanda, noted to his clients that, “The fallout from Evergrande is putting a tremendous dent in risk appetite, sending everything lower. It should not surprise Wall Street that cryptocurrencies are the first asset to be sold in the beginning of the sell-off.”
Cryptocurrency volatility concerns
While the safe haven qualities of cryptocurrencies is evolving, there’s no doubt that the dips in prices present opportunities to experienced investors. Nayib Bukele, the President of El Salvador and noted Bitcoin bull, tweeted that his government has bought the dip, bringing their ownership to 700 coins.
Volatility also aided price recovery in the cryptocurrency space as every currency rebounded from the dip. With the selling pressure exhausted, Bitcoin opened the next trading day at $40,700 and climbed to $45,159 within 48 hours, before unrelated negative news from China sent prices tumbling again. As at the time of writing, Bitcoin is trading at $41,359.
As the Evergrande crisis evolves, the role of cryptocurrencies as safe haven assets is being questioned. There’s no doubt that mainstream adoption has increased and is fueling new price behavior in these markets. In this sense, mainstream cryptocurrency adoption has become a double-edged sword. On the one hand, Bitcoin and other cryptocurrencies are still used as a hedge against traditional assets. On the other hand, the greater capital in the space makes the market more susceptible to declines alongside other high-risk assets.
About VYSYN Ventures
VYSYN Ventures is a longstanding venture capital company that specializes in funding and supporting disruptive startups in the blockchain and cryptocurrency industry. We have provided early-stage support to several projects that have grown to USD market capitalizations of hundreds of millions and even billions. Our incubation program focuses on providing capital allocations, versatile marketing support, and tech assistance.