On Saturday morning, there was information about a possible default of Chinese developer Evergrande Group. Investors in a panic collapsed bitcoin by 25%, but the real fun might begin on Monday.
On Saturday, December 4, a statement from the Chinese construction company Evergrande Group appeared, where it warned shareholders and investors about the impossibility of guaranteeing the fulfillment of financial obligations. Evergrande group is under $350 billion debt and payment of interest on bonds of $669 Million so the company might declare her bankrupt, While China Government has clearly stated that they will not help the falling empire.
Evergrande said it has 2.3 trillion yuan ($350 billion) in assets, but the company has struggled to turn that into cash to pay bondholders and other creditors. It called off the $2.6 billion sales of a stake in a subsidiary last October because the buyer failed to follow through on its purchase.
Evergrande’s statement Friday said the company faces a demand to fulfill a $260 million obligation. It said if that obligation cannot be met, other creditors might demand repayment of debts earlier than normal.
After reviewing Evergrande’s finances, “there is no guarantee that the Group will have sufficient funds to continue to perform its financial obligations,” one of the creditors said in a statement through the Hong Kong Stock Exchange.
ใครจะช้อนรอก่อนเลย มันยังร่วงได้มากกว่านี้ https://t.co/gsEr4JjXFl
— ぼくはくま くま くま くま (@bokuwa_kumaa) December 4, 2021
The unusually sharp reaction from the cryptocurrency market is due to the fact that the announcement was made late Friday evening Chinese time when it was already Saturday in the rest of the world and all financial markets had already closed. Therefore, the cryptocurrency market turned out to be the only serious victim.
One should know the background of China Evergrande Group’s financial problems. In 2021, Chinese construction company Evergrande faced more than $300 billion in debt on a total capitalization of $200 billion. By the end of 2021, the company had to pay interest on bonds in the amount of $669 million.
The bankruptcy of one of the largest developers in China will have a negative impact not only on the Chinese economy but may also lead to a global economic crisis. Despite the inevitable loss of investor confidence in Chinese securities, the Chinese government refused to help the Evergrande.
On November 27, authorities demanded that the founder of China Evergrande Group, Hui Ka Yan, use his own funds to pay off the company’s debts. At the same time, the government monitors the company’s bank accounts so that Evergrande spends money on completing construction projects, and not on payments to creditors.
When creditors did not receive payments on bonds on November 10, the company was on the verge of default for the first time. In total, Evergrande was to pay $148.1 million in interest on three bonds maturing in 2022, 2023, and 2024. In particular, the German agency DMSA (German Market Screening Agency) announced that it had not received payments on the debt from Evergrande, in connection with which it is preparing documents for declaring the Chinese developer bankrupt and inviting all bondholders of the company to join it.
The company later paid $45 million in interest on bonds maturing in 2024 totaling $951 million ahead of the end of the 30-day grace period. A week earlier, also almost on the eve of the end of the grace period, the company transferred $83.5 million in interest payments to holders of other dollar bonds.
Prior to this, on November 9, the developer sold shares of the media company HengTen Networks Group for about $145 million in anticipation of the next maturity of the dollar bonds. Realizing that there will not be enough money to pay off the interest on the bonds on November 18, the company announced that it would sell its stake in the HengTen Networks Group media company for $273 million.
This money was not enough to pay the next interest on the bonds, and the company did not manage to sell the second part of the shares. Therefore, in accordance with rule 13.09 of the law governing the listing of securities on the Hong Kong Stock Exchange Limited and Part XIVA of the Securities and Futures Ordinance (Chapter 571 of the Hong Kong Law), Evergrande has notified shareholders and investors that it is unable to repay the debt.
China Evergrande Group’s probable default information was released on December 4. Probably out of fear of a stock market reaction, the Chinese developer delayed publishing the document until the weekend, when stock markets around the world were already closed. The bankruptcy of a company such as the China Evergrande Group could severely disrupt the Chinese financial system and trigger a new global economic crisis. Evergrande’s $300 billion debt is equal to the GDP of a small developed country like Ireland.
As a result of a deliberate delay in the announcement, stock market investors were deprived of the opportunity, under the influence of emotions, to instantly enter their stock markets because of Saturday. Unlike the stock and futures market, the cryptocurrency market operates seven days a week, with investors rushing to sell off cryptocurrencies to get their dollars back. After the markets open on Monday, these dollars might be invested in gold and other reserve assets, for example, the Swiss franc and government bonds of developed countries.
Obviously, a significant proportion of investors do not consider Bitcoin to be an alternative to gold and protection during a crisis. The strongly increased correlation of BTC with the S&P500 stock index in recent years suggests that large investors view bitcoin as part of a high-risk and high-yield part of portfolios along with stocks, and not as a stabilizing asset, similar to gold and government bonds. Therefore, in days of stock market panic, bitcoin falls even stronger than the stock market due to lack of liquidity.
Serious short-term downside movement in Bitcoin has been recorded since December 1, 2021. Over the past four days, the value of BTC has already dropped by an average of 25%, from a local maximum of $58,600 to $46,200. During the hours of panic, Bitcoin dropped to almost $42,000 and even broke through $30,000 on exchanges with low liquidity. On Sunday, Bitcoin tried several times to return to the previous levels, but could not break through the psychological resistance at $50,000.
Bitcoin’s sharp and unexpected drawdown of almost 30% led to a massive liquidation of traders’ margin positions. The total losses of traders amounted to more than $2.5 billion, of which losses on BTC are over $1 billion. On Sunday evening, the total cryptocurrency market capitalization decreased by 17% compared to Friday evening, from $2.64 trillion to $ 2.26 trillion.
Cryptocurrency investor expectations for Monday are now linked to the behavior of traditional markets after the weekend. The coming days are likely to determine the dynamics of the crypto markets until the end of the year. Since Bitcoin did not manage to form a significant rebound after the first wave of panic, the bull’s hopes for a return to the highs are becoming more and more elusive.
Other Reasons Of Crypto Market Fall
Other reasons analysts suggest for the fall in the value of bitcoin is the profit taken by long-term investors after a long upward trend. Experts also highlight concerns about the new Omicron coronavirus strain and the next round of quarantine restrictions that are causing global markets to fall.
Some analysts note the uncertainty of private and institutional investors in the cryptocurrency market in connection with United States Infrastructure Law, which introduces strict rules for exchanges and brokers related to the storage of cryptocurrencies and reporting to the financial authorities.
Another very significant reason for investors’ doubts about the imminent growth of BTC may be associated with fears that the lenders of the failed cryptocurrency exchange MtGOX will receive compensation for losses and immediately bring it to the market. Trustee Nobuaki Kobayashi confirmed last week that the 141,000 BTC (about $7 billion) in custody will soon be distributed to those affected, and many of them will probably sell the bitcoins that have risen in price hundreds of times.
The expected volume of coins put into circulation by MtGox will be more than 3% of the constant turnover of the asset, and an increase in supply will lead to a drop in prices in the short term especially if the fall in the stock markets drags on.
Mr. Navellier, who’s been watching markets and picking stocks since the 90s told Business Insider that BTC might test 10K again:
“I would take a decline below $46,000 (the 200-day moving average) to be a yellow flag and a decline below the spring low of $28,500 to be a completed massive double top which points to a decline to below $10,000, which incidentally would match many of the multiple 80%+ declines in its storied history.”