Jim Cramer is not one of those financial experts who consistently warns against buying cryptocurrency. However, the popular TV personality has recently urged crypto investors to take profits.
He believes that the whole crypto industry could be hit by the Evergrande fallout in China. What does Evergrande have to do with crypto?
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Evergrande is a massive Chinese property developer which has expanded into everything from food production to sports teams. If it does, the fallout would likely spread beyond the Chinese economy into stock markets worldwide and potentially also crypto.
The greater fool theory refers to the idea that you can make money purchasing an asset because there is someone out there who eventually is willing to buy it from you at a higher price.
It is the third biggest crypto by market capitalization. And if Tether fails, it could undermine the burgeoning crypto industry. Stablecoins are less volatile than other cramer ant bitcoin because their value is pegged to another commodity such as the U. They may 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 cash in reserve to back each USDT token that's issued. However, that hasn't always been the case. As we wrote in August, only 2.
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The rest is in cash equivalents, secured loans, and corporate bonds. It's the cash equivalents that are concerning because a large proportion of them are in something called commercial paper -- a type of short-term debt.
As a digital currency or cryptocurrency, Bitcoin operates without a central bank or single administrator.
In fact, you've probably used this company's technology in the past few days, even if you've never had an account or even heard of the company before. That's how prevalent it's become.
What does Evergrande have to do with crypto?
Sign up today for Stock Advisor and get access to our exclusive report where you can get the full scoop on this company and its upside as a long-term investment. Learn more and get cramer ant bitcoin today with a special new member discount. Get started Tether issued a statement in mid-September to say it did not hold any commercial paper related to Evergrande. But the popular stablecoin has been tight-lipped about what types of loan do constitute its commercial paper.
Jim Cramer: The 'easy money' has been made in cryptocurrencies
And Cramer is worried that some of it could be in China. Cramer fears a domino effect, even though Tether has no direct Evergrande exposure. He told viewers that tons of Chinese businesses could get crushed by Evergrande, which could have an impact on Tether, which would in turn impact the rest of the industry.
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To be clear, he's not necessarily saying investors should get out of crypto altogether. But if you've made money with your crypto investments, now might be a good time to take profits. Should we be worried about Tether?
The short answer is yes. A large proportion of all transactions on cryptocurrency exchanges use stablecoins like Tether.
The fact that such a small part 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 hardly surprising that regulators have stablecoins in their sights.
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Putting aside the issues in China, increased regulation is another reason to be concerned about Tether. According to Bloomberg, Treasury officials will shortly release a policy framework outlining ways to control the cryptocurrency industry, particularly stablecoins. There may also be a review from the Financial Stability Oversight Council on whether stablecoins pose a threat to the economy as a whole.
Increased regulation will almost certainly lead to short-term price pain. And if regulation hits stablecoins hard, it could have a significant impact on cryptocurrency prices. However, in the long run, it may offer necessary investor protections and provide a framework for the industry to flourish.
The show host has made the news countless times for his takes on crypto and his crypto investments.
Should you sell? One of the hardest things about the unpredictable world of crypto investing is holding steady in the face of almost weekly warnings that the sky is about to fall. Even more so when there's truth in some of cramer ant bitcoin warnings.
This is a high-risk environment, and prices could fall dramatically -- uncertainty is part and parcel of this type of investment. On one hand, Bitcoin and other cryptocurrencies have produced eye-watering returns.
And there are many extraordinary projects run by people who believe blockchain technology can change lives.