Jim Cramer is not one of those financial experts who constantly warn against buying cryptocurrency. The Crazy money The host and former hedge fund manager told fans this year that he owns both Bitcoin (BTC) and Ethereum (ETH).
However, the popular TV personality recently urged crypto investors to take profits. The reason? He believes the entire crypto industry could be affected by the Evergrande fallout in China.
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What does Evergrande have to do with crypto?
Evergrande is a leading Chinese real estate developer that has expanded into everything from food production to sports teams. Unfortunately, he owes $ 300 billion, and there is a real fear that he could default on that debt. If so, the fallout would likely spread beyond the Chinese economy to stock markets around the world and potentially crypto as well.
One way to connect to the crypto market is through the popular stablecoin Tether (USDT). Tether is the largest stablecoin in the market, with a market cap of almost $ 70 billion. It is the third largest crypto by market capitalization. And if Tether fails, it could undermine the burgeoning crypto industry.
Stablecoins are less volatile than other cryptocurrencies because their value is tied to another commodity such as the US dollar or gold. They can be more stable, but they can be risky in other ways. Tether is tied to the dollar, and in theory, it should have enough non-crypto money in reserve to support each USDT token issued. However, this has not always been the case.
As we wrote in August, only 2.9% of Tether’s reserves are held in cash. The rest is made up of cash equivalents, guaranteed loans and corporate bonds. It’s the cash equivalents that are of concern, because a lot of them are found in what is called commercial paper, a type of short-term debt.
Tether released a statement in mid-September claiming that it did not own any commercial paper related to Evergrande. But the popular stablecoin has been quiet about the types of loans that make up its commercial paper. And Cramer worries that part of it may be in China.
Cramer fears a domino effect, although Tether doesn’t have direct exposure to Evergrande. He told viewers that tons of Chinese companies could be crushed by Evergrande, which could impact Tether, which in turn would impact the rest of the industry. “If Tether collapses, it’s going to cut off the entire crypto ecosystem,” he said.
To be clear, he doesn’t necessarily say that investors should get out of crypto altogether. But if you have made money from your crypto investments, then maybe now is the time to turn a profit. “If you own crypto in any form and have big wins, I recommend taking something off the table,” he said.
Should we be worried about Tether?
The short answer is yes. A large portion of all transactions on cryptocurrency exchanges use stablecoins like Tether. The fact that such a small portion of Tether’s reserves are in cash means that if a lot of people got nervous and wanted to withdraw their USDT tomorrow, they might not be able to. It’s no surprise that regulators have steadfast coins in their sights.
Aside from the problems in China, increased regulation is another reason to worry about Tether. According to Bloomberg, Treasury officials will soon release a policy framework outlining ways to control the cryptocurrency industry, especially stablecoins. The Financial Stability Supervisory Board could also consider whether stablecoins pose a threat to the economy as a whole.
More regulation will almost certainly lead to lower prices in the short term. And if the regulations hit stablecoins hard, it could have a significant impact on cryptocurrency prices. In the long run, however, it can offer the necessary protections for investors and provide a framework for the industry to thrive.
Should we sell?
One of the hardest things in the unpredictable world of crypto investing is staying steady in the face of the almost weekly warnings that the sky is about to fall. Even more so when there is truth in some of these warnings. This is a high-risk environment and prices could drop dramatically – uncertainty is an integral part of this type of investment.
On the one hand, Bitcoin and other cryptocurrencies have produced tantalizing returns. And there are many amazing projects led by people who believe blockchain technology can change lives. On the other hand, it is a relatively new and unregulated industry. It attracted shady gamblers and outright scams.
There are a lot of things we don’t know. Tether can survive, even with its commercial debt. More regulation can help or hinder the industry, depending on what form it takes. But one thing is certain. Panic investing decisions, whether buy or sell, are rarely good decisions.
Much depends on your personal investment strategy and the price at which you bought it. Cramer bought Bitcoin for $ 12,000. And from what he said, he’s worried about the long-term value of the market. So, for him, taking profits can make sense.
If you bought a cryptocurrency because you did your research, felt comfortable with the risk, and planned to hold it for the long term, it may be a different story. There’s a reason we recommend investing only money you can afford to lose: it means you can withstand tough times.
As a retail investor, it is almost impossible to guess the market. But the benefit of taking a long-term approach is that you can wait for lows and avoid panic selling or buying.