Image courtesy of 123rf.

All governments fear that economic underperformance will unseat them. And nothing that upsets the credibility cart more than rising prices of goods and services – inflation. With a long history of mismatches between government spending and monetary policies, Turkey’s inflation rate ramped up under the current president, Recep Tayyip Erdoğan.

From 2022, Turkey’s inflation rate has gone up to 85.51% in October, halving to 43.68% in April. Image credit: TradingEconomics.com

Serving as prime minister from 2003 and then as president from 2014, Erdoğan will again face his opponent, Kemal Kilicdaroglu, on May 28. At the head of a six-party coalition against Erdogan’s Justice and Development Party (AKP), the former economist ran his campaign under the “Spring will come again” slogan.

But spring is already there for Turks seeking safer harbor from currency debasement.

Turkish Lira to Digital Currency Flows At Record High

In five years, the Turkish lira (TRY) depreciated by 356% against the dollar. In 2018, one could exchange 4 TRY for one USD. A single dollar is worth nearly 20 TRY, a new all-time high. This makes the Turkish lira a poor store of value, as evidenced by Turkey’s historic inflation swings.

On the other hand, Bitcoin appreciated by 216% in the same five-year period. Comparatively to the Turkish lira, that makes both the dollar and Bitcoin superior alternatives; accordingly, there has been a drastic ramp-up of USDT stablecoins on Turkey’s BTCTurk exchange. 

USDT trade volume share on BTCTurk hit an all-time-high of 46% in May. Image credit: Kaiko

Having higher net income than BlackRock in Q1 2023, Tether’s USDT stablecoin is increasingly perceived as a safe-haven asset. This is no coincidence, as Tether’s reserves consist of short-term US treasuries (up to 3 months) to $53 billion out of USDT’s total $82 billion market cap.

Concurrently with the inflow of digital dollars, Turks are dumping the lira for digital assets. 

Out of the global fiat-denominated crypto volume accounted for the twenty largest exchanges, TRY-to-crypto trading volume ramped up from 5% to 15% in May, according to Kaiko Trade Data.

Turkey’s Inflationary Instability Keeps It at the Top in Crypto Adoption

By making fiat money so unreliable, Turkey ranks the highest in digital currency ownership, at 27.1%, according to analytics firm GWI Research. In second place is Argentina, at 23.5%, which crossed the 100% inflation threshold in February 2023. 

(Click on image to enlarge)

Crypto adoption trend as of May 2023. Image credit: Reuters Graphics, source: GWI Research

However, when hedging against currency debasement is a priority, Bitcoin and altcoins take a backseat to tokenized dollars, such as USDT or USDC stablecoins. This lends credence to the “dollar milkshake theory,” devised by financial strategist Brent Johnson.

Greater Demand for Digital Dollars: Milkshake Theory in Action?

Under this theory, the world’s effective central bank, the Federal Reserve, manages liquidity in foreign economies. For instance, through quantitative easing (QE), the Fed exports liquidity and domestic inflation by stimulating the US economy. Foreign investors buy federal debt as US Treasuries (T-bills) because they seek higher yields.

Consequently, this makes the dollar stronger against other currencies. In a feedback loop, USD grows even more attractive to foreign investors. Through this capital siphoning, other countries then face greater volatility and instability. Such a process could even be conflated with de-dollarization. 

Case in point, Argentina’s 7-year low USD reserves manifested as Argentina starting to pay for Chinese imports in yuan instead of USD. This could be seen as a de-dollarization trend, but China’s yuan is effectively pegged to the dollar. After all, China is the second-largest foreign owner of US debt.

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