Cryptocurrency has been volatile lately but a country’s currency collapse shows exactly what could happen to cryptocurrencies in the future.
With much of the world approaching the festive season and preparing for what we hope will be a better New Year, many families and financial market analysts have one thing in common, and they have “roast turkey” on their mind.
It’s not just turkey with all the trimmings, but for those in the financial markets, it’s the currency of the Turkish nation that appears to be evenly cooked.
Since it peaked in January 2008, the Turkish lira has lost as much as 93.8 percent of its value when converted into US dollars.
As President Recep Tayyip Erdogan’s government continues to press its agenda in a bid to keep interest rates low, the Turkish lira continues to slide against major currencies.
Although the lira has fallen in value for more than a decade, it has accelerated rapidly in recent months. Since the beginning of September, the lira has lost as much as 55 percent of its value against the US dollar.
In recent days, some of these declines have been reversed amid intervention from the Turkish government, but the move is only expected to buy time rather than fix the underlying issues behind the weak lira.
While there are a number of different reasons for the lira’s continued decline, the main catalyst in recent months has been skyrocketing inflation.
For the Turkish public, this was a difficult and testing time, as many took to the streets to express their frustration at the rapid devaluation of their currency.
As inflation and currency depreciation continue to erode the purchasing power of consumers in countries around the world, many are looking for alternatives to try to hold the value of their money.
In countries with relatively stable currencies, the idea of putting one’s savings into Bitcoin, Ethereum, or any other cryptocurrency can be an unattractive prospect for many.
The volatility inherent in cryptocurrencies can be a disabling factor for some, with even the biggest currencies like Bitcoin still routinely posting declines of more than 50 percent.
But for people in countries experiencing rapid currency devaluation, rolling the dice and putting their money into cryptocurrency can be a more tempting prospect.
While the stakes can be high, especially when you consider the possibility of losing your stake due to a crypto exchange going bankrupt or being hacked, for people who stare at the prospect of watching their purchasing power evaporate anyway, some may find it worth it. risk.
Earlier this year, there was one word that central bankers around the world used to describe inflation – “temporary”.
Their belief was that inflation would be short-lived and that the decade-long period of relatively weak inflation would soon resume.
So far this has not been proven, and central bankers have had to change their view.
Allianz’s chief economic adviser, Mohamed El-Erian, described the US Federal Reserve’s claims that inflation would be temporary, “perhaps the worst inflation call in Fed history.”
With expectations now growing among economists that inflation may be here to stay, people in countries affected by high inflation and currency depreciation may be more motivated to roll dice at cryptocurrency if inflationary expectations are correct.
If this is truly the beginning of a multi-year shift towards higher inflation as some have suggested, this factor will likely support crypto demand over a long period.
The demand for cryptocurrencies may only be as strong as the cryptocurrency markets
Perhaps one of the biggest issues with cryptocurrency is that it can be a market driven by momentum. When the mood is bullish and the momentum is strong, big price hikes and the emergence of altcoins left, right and center, is the order of the day.
But when that momentum changes and prices fall over an extended period, the outcome can be less rosy for cryptocurrency holders.
In December 2017, the price of Bitcoin reached an all-time high after rising nearly fivefold in less than three months. By the time the price bottomed out the following December, the value of bitcoin had fallen by more than 84 percent.
While there are certainly arguments to be made that the cryptocurrency markets have matured significantly since then, major pullbacks are still relatively common.
If the global financial markets go down again, it’s not hard to imagine cryptocurrency prices following the broader sentiment, at least for a while.
This is what happened during the global market crash in February and March of last year, as shown in the chart below.
As the past few years have shown, trying to make predictions and expectations in this environment can be akin to a monkey shooting darts at a dartboard.
But on a more fundamental level, there are certain things we know with a reasonable degree of certainty.
There will be people in countries with high inflation and currency devaluation who will look for alternative means to protect their wealth, whether it is real estate, precious metals or the conquest of the cryptocurrency world.
Ultimately, cryptocurrency is defined by the psychology of its owners. While this applies to all asset classes to one degree or another, in the crypto world, the level of belief and emotion can cause sharp swings in market sentiment.
This may prove specific to the future demand for cryptocurrencies and a sunflower test for those who consider crypto as a potential alternative amid the ongoing loss of their purchasing power.
Tarek Brooker is a freelance journalist and social commentator | Tweet embed