Why Cryptocurrencies Dropped Like a Rock Today

What happened 

Cryptocurrencies had a very rough start to the week on Monday, some dropping 10% or more. There’s generally a “risk-off” trade taking place where investors sell risky assets to acquire more stable assets, and that tends to disproportionately hurt cryptocurrencies. There’s also some fear that the financial markets are facing a looming crisis, and if that craters asset values, including in crypto, traders could panic-sell or be forced to sell because of margin calls, causing a cascading market impact if. 

As of 10:30 a.m. EDT, Bitcoin (CRYPTO:BTC) has fallen 7.6% over the last 24 hours, Ethereum (CRYPTO:ETH) is down 8.9%, Solana (CRYPTO:SOL) has dropped 10.5%, and Cardano (CRYPTO:ADA) is down 8.6%. Smaller crypto assets have fallen even further, so the drop is widespread in the crypto industry. 

Image source: Getty Images.

So what

The stock market overall is down sharply on Monday morning as investors weigh the risk facing asset values. A company called China Evergrande Group, a real estate developer, is expected to miss interest payments on debt this week, and with $300 billion in liabilities for the company, there could be a cascading impact on financial markets. 

A default by a large company like Evergrande could cause investors to pull back on investing in either debt or equity in Chinese real estate, which could have an impact on debt and equity markets in the U.S. In a worst-case scenario, something like the “Lehman moment” happens: The collapse of one company causes a domino effect across financial markets, affecting both the values and the liquidity (or the availability to sell quickly) of financial assets. Comparisons like this may be speculation at this point, but investors are certainly uneasy that valuations have risen too high too fast and some kind of event will cause a collapse in markets sometime soon, so big reactions to news like Evergrande’s isn’t surprising. 

On a more crypto-focused note, The New York Times reported this weekend that the Financial Stability Oversight Council could deem stablecoins (which are tied to a real currency like the U.S. dollar) systemically risky. This would subject them to regulation, which could dramatically affect the market for stablecoins.

Now what

The reality for cryptocurrencies is that today they’re trading assets for investors, rather than a utility product. And that means that when markets go down we will likely see cryptocurrency prices go down as well. That’s exactly what we’re seeing today. 

What we don’t know is whether there will be any kind of recovery in crypto prices. If there is indeed some kind of financial crisis on the horizon, I worry that stable assets like the U.S. dollar will be the safe haven, not cryptocurrencies that still don’t have much utility. 

We also don’t know how the crypto market will react in a time of crisis. Will investors panic-sell, causing margin calls for some and continued selling? Given the volatility in crypto prices over the last year, I think we’ll see wild swings in prices if financial markets are threatened. If that’s true, this may not be the last big decline for cryptocurrencies this year

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.