Bitcoin, Ethereum and dogecoin are falling as cryptocurrency gets caught up in the Evergrande selloff.
Will Cong is professor of finance at the Cornell SC Johnson College of Business and an expert on financial technology, innovation and entrepreneurship. He says the drop does not bode well for cryptocurrencies because it indicates they are losing their appeal or are simply unstable and prone to market sentiment swings.
“There are four possible interpretations of the drop.
“It’s possible that some stablecoins or cryptocurrencies either directly hold Evergrande's short-term debt or are exposed to other Chinese obligations linked to Evergrande, major banks included. This means the selling demand in these cryptocurrencies is driven by the fundamental concern that the Evergrande debt crisis could spread to the financial markets in general, very much like the case of Lehman Brothers.
“Bitcoin and the like have frequently experienced large swings in their returns over the past few years and the large drop in price and the Evergrande episode could be a coincidence. Despite the industry's effort to create stablecoins, the major cryptocurrencies are still very unstable. Another possibility is that major cryptocurrencies such as Bitcoin have grown to such scale that they are no longer uncorrelated or negatively correlated with other major asset classes such as equities.
“These phenomena could all be driven by market sentiments. Like currencies, investors' coordination plays a big role and "bank run" type of behavior can easily show up. To the extent that the Evergrande crisis sends fears across the market, cryptocurrencies could be the ones that are prominently affected.”
Robert Hockett is professor of law at Cornell University and an expert in financial and monetary law and economics. He says cryptocurrency will take the worst hit as assets are offloaded during the market dip.
“In opaque crises like the one now afflicting China's Evergrande real estate conglomerate, it's less 'what you know' than 'what you know you don't know' that drives financial volatility.
“In these cases of opacity-fueled fear, assets described by the word 'crypto' can be expected to take the worst hits in the asset fire sales that accompany conflagration much as did those more euphemistically called 'subprime' 13 years ago. Bitcoin, Ethereum, and the like are accordingly finding themselves hardest hit right now - even more than the more traditional speculative firms like Goldman. They are, in effect, the new canaries in the current financial coal mine.”