12-28-18 by Spotlight Zimbabwe

How crypto became the cure for economies in crisis

FX Street


You don’t need high-powered binoculars to find economies in crisis—they’re everywhere. Most often, the governments in question are being hammered by the twin curses of high inflation and falling currency values. The remedy followed by most of those distressed countries is to print more money, which, as anyone who knows anything about supply and demand will tell you, just leads to further currency devaluation. The one shining light in the currency news has been cryptocurrency. Are any of these states in crisis likely to go crypto?

When thinking of currencies in crisis, we’re not really thinking of the likes of a pre/post Brexit UK, with its currency slipping from 1.40 USD to the GBP to 1.30. No, we’re talking “hyper” devaluation. For example, the Turkish lira was trading around 2 for 1 with the USD dollar. Four years later, you could buy almost 7 Turkish lira for the same 100 US cents. Now, that’s a currency devaluation. The lira has gained back a little ground, but it’s still hovering around 5.5 to US greenback. Then there is the Iranian Rial, which was trading quite nicely at 24,000 to one US dollar. It is now trading at almost half that value at 42,000. Similar pictures are reflected with the Zimbabwean dollar, the Argentinian Peso, and the Venezuelan Bolivar. Not a pretty picture, for the governments of those countries, or their beleaguered populations.

But perhaps technology could save the day. With the dramatic rise (and precipitous collapse) of Bitcoin and other Internet-friendly cryptocurrencies in the past three years, more than one Economics minister has been considering the possibility of “going crypto”. Might the new form of Internet cash provide a way out of the mess in which many of these economies find themselves bogged down?

Take Turkey, for example, the country that holds almost 20% of all cryptocurrency in circulation. With an inflation rate of almost 12% towards the end of 2017, and with foreign investors rapidly pulling their cash out of Istanbul, Turkish president Erdoğansteadfastly refused to raise interest rates. This led to a flood of Turkish investors turning to crypto as a safe haven for their money. Then inflation rose even higher, hitting 25.24% in October of 2018 before it finally began to recede to its current level of 21.62%. However, just when Turkish crypto investors thought it might be safe to go back into the water, the value of Bitcoin and other cryptocurrencies also started to decline following a global decline in the US stock market.

On the positive side, despite its recent slide, Bitcoin has held its value relatively well, particularly compared to the weak currencies of aforementioned countries. In fact, as the US stock market continues to fall, Bitcoin has actually started a mini rally. Whether this is just a dead cat bounce, or whether it is connected to the recent announcement of OTC trading for Bitcoin, remains to be seen. It is still too early to call it, but if cryptocurrencies hold their value, and effectively buck their prevailing trend, there could be a demand to replace failed currencies with an electric, Internet-connected equivalent. This will certainly be good news for crypto technology and an egg on the chin for crypto skeptics the world over.

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