Finance

Why tether’s links to China is dragging bitcoin price down and other cryptos alongside

Bitcoin fell sharply on 20 September as a wave of selling triggered by tumult in China’s indebted property sector hit the crypto markets.

The world’s largest cryptocurrency was trading at about $43,489 at 5PM ET, down 8.6% from 17 September, according to CoinDesk.

Other digital currencies tumbled too. Ether dropped 10% over the same period, while dogecoin slid 11%. The selloff extended to crypto-linked stocks such as exchange operator Coinbase Global, whose shares fell 3.5% on 20 September.

The crypto slump came as traditional markets were in retreat as well. The S&P 500 dropped 1.7%, following declines in overseas indexes, amid mounting concerns that Beijing will allow property developer China Evergrande Group to default. Evergande’s debt burden is the biggest for any publicly traded real-estate management or development company in the world. Some investors fear an Evergrande failure could have ripple effects throughout China, the world’s second-largest economy.

READ How Evergrande’s woes are hitting cryptocurrencies

Traders and analysts said the selloff in cryptocurrencies was part of a wider global shift away from risky assets, in favour of perceived safe-havens such as US Treasurys.

In addition, an Evergrande default could impact tether, a coin that plays a key role in the digital currency ecosystem, some analysts say. Tether is a so-called “stablecoin” pegged to the US dollar, with around $71bn of the coins in circulation, according to the Block, a cryptocurrency news and research service. It is frequently used by traders to store value or shift assets between exchanges.

The company behind the coin, Tether Holdings, disclosed last month that about half of its assets were held in commercial paper or certificates of deposit. But the often-opaque company hasn’t given a detailed breakdown of its holdings, and many market observers have voiced suspicion that Tether is heavily exposed to Chinese commercial paper.

Last week, Tether said in a statement that it didn’t hold Evergrande debt or securities. The stablecoin has kept its $1 value during the selloff, signalling that it is still trusted by the market. But tether could still be harmed if the China situation worsens, said Noelle Acheson, head of market insights at Genesis Trading.

“If Evergrande collapses, it is very likely to trigger further collapses, which could impact some of the commercial paper that Tether holds,” she said. “That would be bad news not just for market stability, but for confidence.”

READ Revolut pays in bitcoin for new WeWork office space

Regulators including the Federal Reserve and the Securities and Exchange Commission have stepped up their focus on stablecoins in recent months. Some officials have voiced concern that stablecoins aren’t sufficiently transparent about their underlying holdings and could pose a threat to financial stability.

Write to Alexander Osipovich at [email protected]

This article was published by Dow Jones Newswires

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