Examining the Evergrande Crisis, Why Holding Bitcoin Makes Sense
The 2008 financial meltdown showed just how interconnected global finance is.
A systematic collapse of the real estate sector in the U.S. sent shockwaves around the world. The crisis saw the people in all corners of the world–most of whom had never heard of terms like Collateral Debt Obligation (CDOs) and subprime loans–lose jobs and assets in a painful market crash.
After the crisis, banks got bailouts while the ordinary taxpayer was left for dead. It displayed arrogance and unfairness that was hard to stomach. The few players at the top would always be fine despite their indiscretions. Some of the most prominent players in the meltdown are still the most influential names on Wall Street. Meanwhile, some individuals have never got back to their feet after that devastation.
This crisis in confidence served as inspiration for the creation of Bitcoin. Satoshi Nakamoto implemented a decentralized financial system without a few sharks who could control the system and cheat ordinary folk out of their wealth. Instead, it would be a financial system that incorporated democratic control and market forces. Despite the events of 2008, the centralized financial system has not changed much.
Well, we might be on the precipice of such disaster again. If reports from China tally, there is an immense crisis in the country’s chief real estate developer.
China is a massive market, and everything that happens there on a national scale is pretty immense.
Evergrande Group is a vast real estate developer that has experienced liquidity problems on a grand scale.
In September, China’s housing authority notified major banks that Evergrande would not pay loan interest due September 20th.
The numbers are truly staggering. Evergrande has total liabilities in excess of $300 billion, which is a number bigger than most countries’ GDP. The developer is scrambling to raise funds to pay several lenders and suppliers. A total collapse would have devastating results, including for international banks.
The company got into such debt because it used leveraged properties and US-denominated junk bonds to grow. It has a sizable real estate empire, but the debt is starting to catch up.
Their net income has struggled over the past decade, even though their asset holdings are significant. It could result from over-leveraging their properties and getting lesser than expected revenue to sustain the operation. The COVID-19 pandemic exposed the soft underbelly for many industries, and Evergrande was a major casualty.
Some of their properties were commercial and tourism-oriented. These facilities struggled globally and were some of the better-performing properties that Evergrande ran.
Evergrande is in a precarious situation. Rumors that it may not have enough capital to service the interest payments on their loans, never mind paying down their principals, are not helping either. The company will have to liquidate some of its properties in a long-shot attempt to manage the situation.
Potential Impact of a Collapse
In the modern financial world, events in one country can trigger a global domino effect. S&P has downgraded their credit rating to “CC” from “CCC”, with a negative outlook. This downgrade comes because of reduced liquidity and default risks, including the possibility of debt restructuring.
Various banks hold about $88.8 billion of the debt. These banks will have indirect exposure for the inability of Evergrande to meet its credit obligations. The bonds will take a serious hit, and some of the issuers could be in deep crisis.
The domino effect of this development could be crazy. Some have downplayed these concerns, but it is better to assess all possibilities.
Evergrande is a huge story that is somehow not getting the coverage it deserves. It could be that many analysts expect the Chinese government to step in at some point and salvage the situation. The idea of bailouts took hold during the last financial crisis, and China is always keen on promoting stability.
Either way, this is a delicate situation. Should the government let the group collapse, the collateral effect would be disastrous. The expectation that the government will bail out this company is one that many have chosen to hold. It better not be a mistaken view.
Bitcoin And Equity Markets
The correlation between crypto and equity markets is complicated. Sometimes, some events trigger price declines and stock crashes. The outbreak of COVID was one such event.
That said, Bitcoin has one thing over the equity markets. It is an asset that does not depend on banks and centralized institutions for funding and capital controls. The very idea of a decentralized currency is to have independence from the mismanagement of centralized financiers.
If Evergrande were a cryptocurrency, it would collapse without triggering the domino effect that this company could have in the world’s economy. Chinese taxpayers may end up having to bail out a company that took up this mountain of debt without a plan for the proverbial rainy day. In 2008, the banks took a similar route, with most big banks engaging in nefarious activity that saw the entire housing market go down spectacularly.
As always, the little guy paid the ultimate price, with millions losing their homes, jobs, and other effects still lingering today.
Bitcoin offers a clean break from all that. Its prices are a true reflection of supply and demand forces that should be the basis of a transparent financial system. Evergrande has got into this mess because there is a distinct possibility that someone will have to shoulder the burden.
The global financial system needs some work. As it stands, a few players could send the global economy down the drain. These decisions should be more representative and democratic. That is the genius of Bitcoin.
For the record, Bitcoin is not 100 percent decoupled from financial markets. Many Wall Street institutions have invested in crypto, and there will be some instances of correlated price movement. However, the critical aspects of control and consequences make Bitcoin genuinely unique.
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The Bitcoin economy is growing at an unprecedented pace. Events like the Evergrande crisis will continue to sensitize the public about the need for alternative investments in this digital gold.
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