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Plunging Turkish lira causes spike in bitcoin interest

Posted: 14 August 2018 5:33 pm
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When you can't trust anyone with monetary policy, there's bitcoin – where you expressly trust no one.

The Turkish lira is in sharp decline, falling 50% against the US dollar over the last year. It was hit especially hard over the last couple of days, with a corresponding spike in bitcoin interest. Sinking prices notwithstanding, bitcoin and cryptocurrencies are clearly finding function as an alternative store of value as it has before in other countries.

Nobel Prize-winning economist and notable "no-coiner" Paul Krugman describes the cause and effect of Turkey's current troubles like so:

  • Turkey became a popular spot for foreign investment and incurred a lot of debt over the years. Crucially, this debt is denominated in US dollars rather than Turkish lira.
  • The investment abruptly dried up. This triggers, and was triggered by, a general loss of confidence in Turkey's management.
  • This drying up of investment and loss of confidence causes the Turkish lira to start dropping
  • The dropping lira shifts Turkey's ratio of foreign investment, measured in US dollars, to GDP. This triggers further loss of confidence and causes further drops.
  • Because the lira is falling, and the foreign debt is in US dollars, the amount of debt measured in lira skyrockets. Those with outstanding foreign debts (such as banks) risk going bankrupt very quickly.
  • Death spiral. Typically the falling currency would fuel an export boom, but fate may have other plans.

Cryptocurrency has always tended to be most popular in countries whose inhabitants justifiably lack faith in the government money. Turkey certainly qualifies right now.

A similar trend is being seen in Iran, where people look towards cryptocurrency in the absence of other opportunities and a declining rial. But unlike Iran, Turkey has an active above ground cryptocurrency scene, making the growing interest clearer to see.

Turkey's largest exchange, Koinim, has seen a 63% increase in bitcoin trading volume, while others like BTCTurk and Paribu have seen similarly enormous growth. Many others were also anecdotally noting a surge in interest from Turkey.

Turkey's open crypto exchanges policy might soon come to an end though. In these kinds of situations, conventional wisdom is to prevent capital flight, but the ease with which one can move money overseas through crypto makes it a problematic asset for any government that's struggling for control of its own currency.

Turkish President Recep Tayyip Erdogan has suggested that this might be on the cards, encouraging locals to trade out other currencies for the lira to do their part in the "economic war." The Turkish lira responded to Erdogan's choice of words by sliding even further while he spoke, suggesting a profound lack of confidence in the government's ability to manage the problem.

The turn to cryptocurrency might make economic sense for someone wanting to shelter their wealth. It might also make sense from a more philosophical perspective. When confidence in human institutions is shattered, people turn to a higher power. And in cryptocurrency, that higher power can be technology itself.

Disclosure: At the time of writing, the author holds ETH, IOTA, ICX, VET, XLM, BTC and ADA.

Disclaimer: This information should not be interpreted as an endorsement of cryptocurrency or any specific provider, service or offering. It is not a recommendation to trade. Cryptocurrencies are speculative, complex and involve significant risks – they are highly volatile and sensitive to secondary activity. Performance is unpredictable and past performance is no guarantee of future performance. Consider your own circumstances, and obtain your own advice, before relying on this information. You should also verify the nature of any product or service (including its legal status and relevant regulatory requirements) and consult the relevant Regulators' websites before making any decision. Finder, or the author, may have holdings in the cryptocurrencies discussed.

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