Last year, JPMorgan, in an analytical note to investors, noted the high probability of replacing Bitcoin with gold as an insurance against inflation. At least for one of the developing countries, this forecast has come true: in two weeks, the Turkish lira has lost over 30% of its value, and inflation has reached 20% again.
In response to rising inflation, central banks usually raise the key rate to reduce the turnover rate and the number of loans. Loans are becoming expensive, deposits are preferred, the “temperature” in the economy is falling, and prices are falling. This path is not without drawbacks, but it avoids hyperinflation, which is disastrous for any economy.
The Turkish President has his own vision of financial policy, which runs counter to classical economic theory. Since 2019, Erdogan has changed the head of the Central Bank three times because he wanted to keep the key rate at low levels. Coupled with the large embezzlement of the state apparatus, the military campaign in Syria and the growing public debt, this led to an increase in inflation to 19.9% in October. At the same time, the Central Bank in mid-October lowered the interest rate from 18% to 16%.
Inflation in Turkey, %Inflation in Turkey, %
Since 2020, the Turkish lira has more than doubled in price against the US dollar. In search of insurance against devaluation, Turks began to buy Bitcoin en masse, and the number of registrations on cryptocurrency exchanges from this region tripled by the end of 2020. In March 2021, the volume of cryptocurrency trading in the country reached $27 billion, which is 30 times more than the same period last year. Then Erdogan declared a fight against cryptocurrencies and in April banned their use as a means of payment. Some of the Turkish crypto exchanges have closed, but this has not stopped the public’s interest in Bitcoin.
According to the local cryptoplatform BtcTurk, only in the last day the turnover for the BTC /TRY pair exceeded $ 55 million and continues to grow. According to the head of MicroStrategy, Michael Saylor, Bitcoin is the last hope for Turkey, and the country should follow the example of El Salvador.
Bitcoin has a fundamental difference from national currencies – a deflationary mechanism. When individual states and rulers can print more money to finance political ambitions, the rate of the emergence of new Bitcoin steadily decreases from year to year. In addition, every four years, the reward of miners for the mined block is reduced, and the total number of coins is limited to 21 million. Since January 2020, the money supply (M2) of the Turkish lira has increased by 56%, and the amount of Bitcoin has increased by only 4.1%. Unsurprisingly, the BTC/TRY pair is storming new highs.
And what do you think, can cryptocurrency be considered as insurance against inflation?