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Bitcoin Could Fix Turkey’s Currency Crisis

By Frank HolmesForexDec 06, 2021 02:47PM ET
www.investing.com/analysis/bitcoin-could-fix-turkeys-currency-crisis-200610610
Bitcoin Could Fix Turkey’s Currency Crisis
By Frank Holmes   |  Dec 06, 2021 02:47PM ET
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It’s December 2021, and the Turkish lira is near an all-time low against the US dollar as President Recep Erdogan continues to implement what the Wall Street Journal calls “unconventional economic policies.” Turkish households saw the value of the national currency plunge nearly 30% last month alone, making everything from food to fuel significantly more expensive for already-struggling families.

Like many others, I believe Bitcoin could fix Turkey’s lira problem. And to understand why, it might be helpful to dust off a book written 45 years ago by Austrian economist Friedrich Hayek.

3-year TRY/USD chart
3-year TRY/USD chart

In the book, Denationalization of Money, the Nobel Laureate makes the case that a government’s monology over money is just as undesirable as any other monopoly. He argues against the creation of a shared European currency—something that would become a reality in 1999 when the euro was introduced—and he proposes that private institutions should be allowed to issue their own currencies.

It’s an idea that Hayek acknowledges is “too unfamiliar and even alarming to most people.” And yet, he says, those same people would eventually learn to see the benefits of a system that allows government-issued fiat currency to “compete for the favor of the public.”

But compete against what? Although written half a century ago, Hayek’s book seems to anticipate the rise of digital assets such as Bitcoin and Ether, which today are the closest thing we have, other than gold and silver, to denationalized money.

Hayek Portrait
Hayek Portrait

Bitcoin Fixes This

As I write this, more than 15,000 different cryptocurrencies are available to trade, according to CoinMarketCap. Even Hayek would agree that’s too much competition. To keep things simple, we’ll stick to talking about Bitcoin.

As a decentralized asset, Bitcoin is precisely the kind of asset Hayek may have had in mind. It’s not issued by, nor does it belong to, any government. No central bank controls it. It’s completely border-agnostic. I can no longer send money to someone in Cuba using Western Union (NYSE:WU) since operations ended there last year. But Bitcoin? No problem.

What’s more, Bitcoin has been a fabulous store of value compared to traditional currencies such as the Turkish lira and even the dollar, whose purchasing power has steadily deteriorated since the Federal Reserve’s founding in 1913. In the past 40 years alone, the greenback has lost two thirds of its value as Fed governors have pursued increasingly more unorthodox monetary schemes.

US dollar century chart
US dollar century chart

As for the problem of monetary manipulation, Hayek sees competing currencies as the solution. If people had a choice, he believes, this would “prevent governments from ‘protecting’ the currencies they issue against the harmful consequences of their own measures.” In other words, central bankers and finance ministers would have a harder time “concealing” measures to depreciate the value of their currencies.

It should start to make sense, then, why countries like China and Turkey have effectively banned Bitcoin, and why bureaucrats and policymakers in the U.S. and Europe are eager to regulate it?

Free Markets, Free Currencies

Despite the crypto ban, many Turks have reportedly turned to Bitcoin, not to mention Gold, as the lira continues to sink due to Erdogan’s insistence on lowering interest rates to combat out-of-control inflation. Yes, central banks ordinarily hike rates to control higher prices, not lower them, but Erdogan allegedly does not want to risk economic momentum for economic stability. And before you say it, no, heads of government are not typically put in charge of monetary policy.

The country’s finance minister, Lutfi Elvan, resigned in protest last week, and Erdogan immediately replaced him with a loyalist. This tells me the president won’t be abandoning his easy money scheme anytime soon, which is bad for consumer prices but good for Bitcoin’s use case.

I’m a believer in free markets, as I assume you are. Competition benefits consumers not just because it gives them choices; it also breeds innovation and helps keep price in check.

Monopolies generally have the opposite effect, but for some reason, we generally don’t think of the lira or the dollar or any other fiat currency as being a "monopoly.” Perhaps it’s time we should.

Disclosure: All opinions expressed and data provided are subject to change without notice. Some of these opinions may not be appropriate to every investor.

Bitcoin Could Fix Turkey’s Currency Crisis
 

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Bitcoin Could Fix Turkey’s Currency Crisis

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Comments (8)
Ali Küloğlu
Ali Küloğlu Dec 08, 2021 12:58AM ET
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Ugh!
No Name
No Name Dec 07, 2021 2:27PM ET
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Good written article but things are not simple as you think, Mr. Holmes.
Duke Maverick
Duke Maverick Dec 06, 2021 11:43PM ET
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Really?
Kaveh Sun
Kaveh Sun Dec 06, 2021 11:30PM ET
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A naieve solution. The problem is printing for gov spending. Can the gov print Bitcoin? No, then where else gov make money beside tax? Raise Tax on all citizen 30% or more? The money drop because their gov printing. It is indirect taxing but their citizen dont know. Taxing them 30% more, then they u see a revolution.
Oldfashioned Owl
Oldfashioned Owl Dec 06, 2021 10:46PM ET
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Bitcoin is an excellent idea. Decentralized & a nightmare for manipulators. But, its just going through a hard time with many governments scrambling to ban it. How else will corruption fester?! But it feels like crypto will foster & promises an corruption free version of democracy. The purest form of democracy. Let's see how this pans out. I hope it does.
Allatra Yiveh
AllatraYiveh Dec 06, 2021 5:08PM ET
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"Bitcoin has been a fabulous store of value" ?? A store of value should not drop more than 20% in hours multiple times in just a year. How can one transact/trade for daily life if Bitcoin is so slow (minutes to confirm) with so high transaction fee and can drop its value at anytime significantly. Bitcoin can never work.
mohammad rabie
mohammad rabie Dec 06, 2021 5:08PM ET
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It has a high frequency, but end of year it closes +ve.
Peter ONeill
Peter ONeill Dec 06, 2021 5:08PM ET
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mohammad rabie  Until the Fed or ECB gets bored of it and closes it all down with the stroke of a pen?? Already been made illegal to trade in China / India and Russia.
Comic Relieve
Comic Relieve Dec 06, 2021 3:30PM ET
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Bitcoin won't magically solve a economic problem, at least I don't see any case study of a real example yet.  Plano Collor is a working example of one amazing country work it out.  Losing monetary authority means you have one less tool to work a struggling economy.  Look at how China devalue its currency to help export and how Greece's debt crisis didn't get better over the years.
Sidney Glover
Sidney Glover Dec 06, 2021 3:24PM ET
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why not just claim Nostradamus predicted bitcoin? Decentralized? really ? Frank Holmes has drank the Kool-Aid 15000 crypto coins and growing but to keep things simple, we will discuss Bitcoin really. does Frankie know how cryptos are controlled and created? small group controls each coins algorithms and forks. small groups. Frankie, you are sadly given the right to be published by a company that pushes cryptos. shameful article
mohammad rabie
mohammad rabie Dec 06, 2021 3:24PM ET
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Yes, but the idea of alternatives away from government regulated currency is what the book proposed and is what will be the real solution.
Peter ONeill
Peter ONeill Dec 06, 2021 3:24PM ET
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mohammad rabie  Do you really think Governments will just stand by and let an unreg market continue to grow? (A market used by a lot in black market trades and to avoid economic sanctions). The Fed will pull the rug from under bitcoin as soon as its own backed currency or a currency backed by the main banks is ready to be rolled out (China, Fed, ECB and BOE all working on their own state-supported cryptocurrencies already to replace the current unregulated currencies)
 
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