One criticism sceptics of Bitcoin often raise is the volatility of the cryptocurrency. Commentators and economists unconvinced of Bitcoin’s utility fail to consider that Bitcoin is still a new and developing technology with a small market capitalisation. Over time, as the size of the Bitcoin market grows, it will stabilise and become less volatile. For the time being, Bitcoin is an erratic asset, having fallen 65 percent from its peak earlier this year. However, last week amid economic tensions with the US, the Turkish Lira fell a whopping 20 percent against the US Dollar.
Over the past couple of weeks, an escalating dispute with President Trump over tariffs on Turkish steel and aluminium caused the Turkish Lira to lose a fifth of its value against the US dollar, pushing it to record lows and down a massive 45 percent so far this year. During the Lira’s 20 percent tumble last week, Bitcoin was perceived as a stable asset. The volatility of the Turkish Lira this year is comparable to the decline seen in Bitcoin. Thus, have we now entered a time where some fiat currencies are less stable than Bitcoin?
Last week, Koinim, Turkey’s largest exchange, reported a 63 percent increase in Bitcoin trading volume, while the BTC Turk and Paribu exchanges saw their volumes spike 35 percent and 100 percent respectively. In fact, in the 24 hours following the announcement of President Trump’s tariffs, the trading volume of BTC Turk was up 130 percent and Paribu’s up 107 percent.
The tariffs impose by the US drove investors not into the traditional safe haven asset of gold, but into Bitcoin. The sharp increase in Turkish demand for Bitcoin even pushed the local price of one BTC up to $7,000, a $500 premium over the spot price of Bitcoin.
There are a couple of reasons why Bitcoin is favoured over gold in times of currency crisis. Firstly, Bitcoin is a lot easier to purchase that gold. Being a digital object, Bitcoin is easily accessible, and taking ‘delivery’ of Bitcoin into a private wallet only takes a few seconds. In comparison, buying gold to hedge against a falling local currency requires a trip to the local bullion dealer, usually with a large amount of cash, and then lugging the purchased gold coins or bars back to safety. Added to this, with a currency crisis at hand, the bullion dealer will most likely be swamped with customers, resulting in long lines and customer chaos similar to scenes from a Boxing Day sale.
Secondly, Bitcoin offers an exit from the local currency without the need to flea the country physically. The ease in transacting and spending Bitcoin means that local commerce can continue to function in a way that gold coins and bars simply can’t offer. Bitcoin expert Andreas Antonopoulos commented that “One of the interesting things that happens with cryptocurrency is your ability to stay put, stay in place, and economically exit without leaving the country. Continue to trade with your neighbours, engage in commerce with other people; exit only from the currency, and stay where you are.”
According to a statement by the Trump administration, there will be no immediate deal to ease tensions between it and the government of Turkey. In retaliation, Turkey has unofficially introduced capital controls on foreign currency purchases after Turkish President Tayyip Erdogan called on residents to convert their US Dollar and foreign exchange holdings into Lira to help bolster the failing currency. For economists and commentators who have stated that Bitcoin serves no usefulness or purpose, this is precisely why Bitcoin exists!
Bitcoin is the answer to currency chaos. While the heads of state wage a trade war with the intention of helping their country’s economies, they inadvertently create a currency war which greatly diminishes the wealth of their citizens. Unlike fiat national currencies, Bitcoin is not controlled by bureaucrats or central banks. It is resilient from currency wars, and operates irrespective of government sanctions or policy. Rather Bitcoin is based on a maths equation and cannot be altered or marginalised by government actions.
So what are the implications of the US-Turkish trade war on Bitcoin going forward? The currency crisis in Turkey appears to be contained just to that country, and the price action of Bitcoin hasn’t reflected any greater concern. However, the consequences of what happened in Turkey last week are far reaching. As President Trump continues his ‘America First’ platform on his quest for nationalism and re-negotiating trade deals, the wider world may begin to see Bitcoin as an alternative asset in such a volatile landscape. This is an interesting thought because Bitcoin itself is quite volatile. However, we now live in a world where one political action, or even a poorly worded tweet can disrupt global trade and commerce. Bitcoin is still very young, but as trade and currency wars continue to arise in the future, Bitcoin may become more and more attractive as an exit from the fiat currency system.