Evergrande and the Cryptocurrency Market Selloff Explained

23 בספט׳ 2021

In this post, I'll be providing an explanation on a theory regarding the potential connection between China's giant real estate developer, Evergrande, and Tether.
If you aren't familiar with Evergrande and the crisis it's currently going through, make sure to check out my previous post below:

Disclaimer: This is not investment advice. This is for educational and entertainment purposes only. I am not responsible for the profits or loss generated from your investments. Trade and invest at your own risk.

Evergrande's Shadow Banking Funds
- In my previous analysis, I mentioned the existence of Evergrande's 67B liability from shady sources.
- People, including renowned investors like Michael Burry, are posing doubts as to whether this liability has connections with Tether, a company that offers stablecoins in the cryptocurrency market.

About Tether
- Tether offers USDT, a stablecoin that is convertable for 1 USD.
- Essentially, what it does is not so different from what banks used to do, and continue to do today.
- During the gold standard, when you took $500 to the bank, they'd give you an ounce of gold.
- Tether guarantees that they'll provide 1 USD per 1 USDT
- But, some say that Tether is faced with a bank-run like situation, looking at its reserves.
- According to their March 2021 Reserves update, commercial paper accounts for 65% of Tether's cash reserves.
- For those of you who don't know, commercial paper, or CP, is a way to finance extremely short term loans at a very cheap rate.
- Tether did not disclose whose CPs they were, in order to protect their partner's privacy.

Tether's Commercial Paper
- Back in July this year, Tether’s CTO and general counsel had an interview with CNBC, and made a few important points.
- They said that they have about 30B in AA rated International Commercial Paper, and these were rated AA by S&P and Fitch.
- The point that some people are making is that Tether’s commercial paper might actually be Evergrande’s commercial paper.
- This may seem like a conspiracy theory, but there are certain points that line up.

Reason #1
- First, Tether currently has 30B in commercial papers, and that’s an insane amount of money.
- Reuters reported that Shengjing Bank, the bank affiliated with Evergrande, is under investigation for providing illegal loans up to 20B.
- Considering that even a more renowned company like JP Morgan can’t write 20B loans, there is plausible reason to doubt that the capital may have come from Tether.
- So taking into consideration the size of the loan, some say that it’s highly likely that the capital flowed into Chinese real estate companies.

Reason #2
- Secondly, even after Bitcoin peaked in mid April, Tether continued to print more USDT. To be precise, they printed 15B between mid April and early June.
- In case you don’t know what bitcoin has to do with this, there have been claims that Tether has been arbitrarily printing USDT.
- This USDT would be used to manipulate the price of Bitcoin, and the overall cryptocurrency market in general.
- While Tether has been printing money like crazy, and as soon as Evergrande CPs defaulted on June 7, they stopped printing USDT.
- Now this is a chicken or egg question where we don’t know if Evergrande’s liquidity problem caused Tether’s collateral to impair, or whether Tether’s cutoff caused the liquidity issues at Evergrande, but something sure smells fishy.

How the Market Structure Would Break
- Tether claims that they don’t hold any Evergrande commercial papers, but we don’t know anything for sure yet.
- If it turns out that Tether was lying, and we see a domino effect take place, it would look something like this:
- Evergrande, along with other real estate developers in China, would go default.
- Tether, who lent them money in the form of commercial paper, could also go default.
- And with tether going default we would see the cryptocurrency market take a huge hit.

Where is Bitcoin Headed?

- So at this point, you may be wondering: where would Bitcoin be headed with this absolute mayhem of a situation?
- While Bitcoin and the overall crypto market crashed, we did manage to close above 40.7k on the daily.
- This would indicate that the overall uptrend remains intact, despite the awful news.

Conclusion
So many answers still remain unanswered. Where does Tether put its billions? Who issues 30B in AA International Commercial paper, willing to pay anything? Why did Tether stop printing money as soon as Evergrande’s liquidity died? As I've said in the previous post, the best thing we can do as investors is to prepare for all probable situations. In my personal opinion, the Chinese government seems willing to indirectly solve the issue by injecting capital via open market operations, so it's more likely that this situation will be settled at one point, as opposed to leading to the entire global financial market collapsing.

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