Money

Turkey’s imminent crisis and the role of crypto

September 4, 2019


After a decade of growth, Turkey’s economy is expected to further contract this year - perhaps even slide into a longer recession. Already in Q4 of last year, the economy contracted by 3%, with the Turkish Lira devaluing nearly 30% against the US dollar. 

A recent article in Bloomberg even goes so far as to say that the Turkish economy may collapse altogether in a fashion similar to what we’ve seen in Latin American populist regimes. In such an event, we’re likely to see increased interventionism and the imposition of capital controls - meaning it’ll be difficult for people holding the Turkish Lira to move their funds out of the country or into other currencies. 

While we don’t want to get into the politics of the matter, or even attempt an analysis of what’s happening to the Turkish economy, the situation does call for an important conversation about wealth preservation, and for our purposes, the important role cryptocurrency may play. 

Wealth preservation

Most of us deposit our savings into domestic bank accounts. Over time, we may collect interest on these deposits. But putting all our eggs in one basket, especially when the economy is showing signs of fragility is not wise.

While investing is first about making money, we also have to have plans in place to make sure we don’t lose that money. This means we need to think in the long-term and make sure that we diversify our portfolio. In other words, we have to spread our funds across multiple asset classes. 

In Turkey, but also in places like Venezuela, or in countries that have vulnerable currencies, wealth preservation is not just something business and fund managers need to think about. Spreading risk should also be top of mind for individuals and families. 

For ordinary citizens, spreading risk could be as simple as applying for a multi-currency account with the bank, and putting some money in other currencies such as the US dollar, the Japanese Yen, and the Swiss Franc. Perhaps, the financially savvy know their way into commodity markets - where they can invest in oil, gold, or metals.

Some high-net-worth-individuals also resort to investing in exclusive real estate, fine art, jewelry or even rare coins and antiques. 

These are good approaches, but they do come with some problems. First, when it comes to property such as real estate, or even fine art, there is always a risk of having them seized, or if sanctions are imposed, assets could be frozen. Especially in countries where the rule of law is not strong the risk of confiscation is real. Also, if you wish to move physical assets out of the country, this may not be possible. 

Another problem with some of the above strategies is that they may not be possible once capital controls come into place.

What are capital controls?

Simply put, capital controls are measures that limit the flow of foreign capital in and out of the country. Such measures include taxes, tariffs, and volume restrictions.

When put in place, which often happens when a country’s economy is under threat, it becomes incredibly difficult for domestic citizens to obtain foreign assets.

While these types of measures may be useful for a while to prevent people from moving out of the local currency en masse, sometimes - as we’ve seen very clearly in Venezuela - the reality is that capital controls don’t effectively tackle the underlying problems, and as the economy continues to collapse and the local currency continues to tumble in value, people are rendered helpless as they see their life savings turn to pocket change. 

What role can crypto play 

Bitcoin is largely still unregulated, meaning that even if capital controls are in effect, it is possible for people to obtain Bitcoin. But since banks are regulated, obtaining Bitcoin may not always be so easy.

Cash is key. In countries such as Venezuela, over-the-counter trading into Bitcoin is incredibly popular. In fact, together with Russia, Venezuela tops the global charts of over-the-counter trading into Bitcoin in terms of volume and activity.

But it isn’t just Bitcoin that should be of interest here. With Bitspark, we’ve built a comprehensive ecosystem across different crypto assets, including Bitcoin, Ethereum, Bitshares and a wide range of stablecoins pegged to local currencies. 

At any of our affiliated cash points, you’re able to exchange cash in your local currency for its stablecoin counterpart (say, Philippine Peso for stable.PHP). Once you hold stable.PHP, in a matter of a few clicks you’re able to diversify your portfolio, spreading risk across stablecoins for US dollar, Euro, Japanese Yen, Gold, and other cryptocurrencies such as Bitcoin. 

Putting your money into crypto effectively gives you back financial freedom. You’re able to transfer money to friends and family abroad, or receive money in a currency of your choice; you can deposit your Bitcoin onto an exchange and start day trading into other cryptocurrencies; in some places, you can use crypto to pay for your utility bills; and so on. 

The situation in Turkey is not unique. To different degrees, people are concerned about Iran, the UK - in the context of Brexit - the US, the economy in China, or even the prospect of a repeat of the 2008 Financial Crisis.  

In each of these situations, people need to think about the plans they have in place to preserve wealth, and this is where crypto really gets to shine. 

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