Currency Crisis = Bitcoin’s Boon?
Juan Villaverde is an econometrician and mathematician devoted to the analysis of cryptocurrencies since 2012. He leads the Weiss Ratings team of analysts and computer programmers who created Weiss cryptocurrency ratings.
In Turkey, Google searches for “Bitcoin” have doubled since the local currency crashed. With every new currency crisis, more people turn to crypto as a safe haven to protect their wealth.
If the difficulties continue, Erdoğan’s government will be forced to impose capital controls and stem the outflow of capital from the country. Estimates place the debt burden on corporations and financial institutions at some $220 billion.
Our prediction: Should Turkey decide on capital controls, expect Bitcoin to trade at a significant premium on the country’s OTC markets.
This permissionless, censorship-resistant and decentralized form of money is exactly what’s needed to combat a currency crisis, deeply rooted in an aging system. Especially in Turkey, where politics and money are centrally managed and authoritarian, decided by a cabal of unelected officials.
But we’ve seen this all before.
It’s a consequence of the decades-old practice by central banks, which drives interest rates to near-zero … starves financial institutions of the yield that they need to keep operating … and makes mincemeat of the income that retirees depend upon.
What’s worse, artificially low interest rates encouraged individuals and institutions to take on huge risks. Low rates have forced capital to seek returns elsewhere — leading them to invest in places that would normally be considered too volatile, or pose great speculative risks.
Governments glance nervously at one another, wondering which will be the next to fall. This is a systemic issue in a monetary system held hostage to interest-rate decisions, which are often made by academics with no personal experience navigating global capital markets.
Remember when the Federal Reserve drove interest rates to zero? That was done to stimulate domestic inflation, in a move aimed at fighting the specter of deflation that harangued the U.S. economy following the 2008 collapse.
There is, however, one very serious problem: The U.S. dollar is the world reserve currency.
So, what happens when dollars are cheap to borrow? Emerging markets like Turkey were flooded with capital from pension funds chasing higher yield.
They would have stuck around indefinitely as long as U.S. rates continued at near-zero levels. But, now, the Federal Reserve is raising rates and pulling the plug.
Argentina is another calamity in the making. The peso has continued to fall steadily from about five cents to three and a fraction — all since the beginning of this year.
The monetary system is in flames.
Citizens of Turkey and Argentinians understand this. They’ve experienced their fair share of currency collapses before. So, they get why Bitcoin and other cryptocurrencies are imperative to preserving their wealth.
They rarely ask whether to buy crypto or not. Instead, they just want to know where and how fast they can get their hands on it.
It will not stop. The cracks are widening.
Whether it’s the Fed’s reckless rate reductions that sent capital fleeing to higher-yield, high-risk countries … their latest policy of raising rates, currently driving emerging-market currencies into the floor …
Or whether it is the European Union’s money-printing euros to help prop up the weaker member-states …
There is a growing realization that something’s broken.
Fiat money is not working.
Eventually, people will abandon the perceived safety of government-sanctioned money and move toward a system that is freer, more transparent and equitable for all.
Turkey’s currency collapse, now considered the exception, could become the norm.
A long list of countries is set to follow. Every time another currency sinks, more people will migrate into crypto. Once they buy in, they will be reluctant to leave.
A loud chorus of demands will rise from the fiat-money chaos. They will demand fair treatment of cryptocurrencies by central banks. They will demand that the remaining fiat currencies provide the same level of transparency and accountability. And if their demands are not promptly met, still more will flee.
It won’t happen overnight. It will take place in stages over long periods of time. But ultimately, cryptocurrencies will become the world’s new financial standard.