The vulnerability of a fiat currency is exposed to the economic trade war
On August 10, Trump announced the increase in tariffs of 50% and 20% on steel and aluminium respectively. Consequently, the Turkish Lira plummets by 80% against USD on a Year-to-Date basis – according to Yahoo Finance. The sharp decline in Turkish Lira has pushed up the inflation rates to 16%, higher than most of the European countries. As opposed to lowering the interest rates to counter the inflation, Turkey’s President Erdogan calls on Turks to fight back by selling off foreign currency in exchange for Turkish Lira.
Bitcoin increase in appeal as a store of value
On Aug 13, Turkish Lira fell against USD but rise against Bitcoin (BTC). According to CoinMarketCap, Paribu Exchange-a turkey crypto-exchange-reported an increase of 100% in trading volumes for the trading pair – BTC/TRY.
At press time, BTC/TRY is 1 TRY for 0.000026 BTC, and the trendline has been steadily increasing over the last 5 days.
The reasons behind choosing Bitcoin over conventional commodities
Turkey is mostly an Islamic country, and Bitcoin is in accordance with the Islamic law. According to the Writer of Bitcoin in Islamic Banking and Finance, Charles W. Evans, “It shows that a Blockchain Management System can conform to the prohibition of riba (forbidden of interest incurred)—as Bitcoin does—and incorporate the principles of maslaha (social benefits of positive externalities) and mutual risk-sharing (as opposed to risk-shifting). With regard to maslaha, the world’s unbanked number in the billions and represent the majority of the world’s adults.” This could be one of the main reasons that Turks are readily accepting cryptocurrency.
The second reason is due to the design of Bitcoin.
Turkish Lira is a fiat currency and is subjected to volatility as no physical commodity back it. The value of fiat is derived from free market and sometimes government intervention.
In contrast, Bitcoin is a deflationary currency by design; there are only a finite number of them and likened to the limited commodities of the world like gold. Thus, the value of Bitcoin would rise over time as there are 21 million Bitcoin in circulation. As shown in the following chart from CoinDesk, BTC/TRY clocked a 7-month high of TRY 47,192 on Aug 13.
Many countries across the globe have felt the ripples of the trade war: Canadian Dollars (CND) slid by 0.8% against USD in January, Korean Won weakened against the dollar as trade wars intensify between the two superpowers in June, and Euro is slightly down against USD in August.
If the economic trade wars fail to stabilise, BTC could become a haven for investors and might rise above in dollar value against weak and emerging fiat currencies.
The author holds no cryptocurrency assets at the time of writing. The above article does not serve as investment advice and would not be liable for loss.
Photo Credits: CoinDesk, CoinMarketCap, Google Finance, TechCrunch