While cryptocurrency has been volatile recently, the collapse of a country's currency demonstrates what could happen to crypto in the future.

While much of the world is wrapping up the holiday season and preparing for what we hope will be a better New Year, many households and financial market analysts have something in common: they are thinking about "turkey."

Not only the turkey with all the trimmings appears to have been fired, but also the Turkish currency, according to those in the financial markets.

The Turkish lira has lost up to 93.8 percent of its value when converted to US dollars since its January 2008 peak.

The Turkish lira continues to depreciate against major currencies as President Recep Erdogan's government maintains pressure on its programme to keep interest rates low.

Despite a decade of decline, the pound's value has accelerated in recent months. The pound has lost up to 55% of its value against the US dollar since the beginning of September.

Some of those declines have been reversed in recent days as a result of Turkish government intervention, but the move should merely buy time rather than address the underlying causes of the pound's weakness.

While there are a variety of reasons for the pound's continued decline, inflation has been the primary driver in recent months.

This has been a difficult and trying time for the Turkish public, with many taking to the streets to express their frustration at the rapid devaluation of their currency.

As inflation and currency devaluation continue to erode consumers' purchasing power in countries throughout the world, many are looking for alternatives to ensure their money retains its value.

The cryptocurrency alternative

In countries with relatively stable currencies, the prospect of investing in bitcoin, Ethereum, or another cryptocurrency may seem unappealing to many.

Cryptocurrency's inherent volatility can be a game changer for some, with even the largest currencies such as Bitcoin still experiencing declines of more than 50%.

However, for residents of countries with rapidly depreciating currencies, taking a chance and investing in crypto may be a much more appealing prospect.

While the risks can be high, especially when considering the possibility of losing your stake in the event of a crypto exchange going bankrupt or being hacked, they are worth taking for those whose purchasing power is declining. If it's going to evaporate anyway, some may consider it worthwhile.

A future of inflation?

Earlier this year, central bankers from around the world used the term "transient" to describe inflation.

Their belief was that inflation would be temporary and that the decade's long period of relatively low inflation would resume shortly.

This has not been the case thus far, and central bankers have been forced to adjust their thinking.

Mohamed El-Erian, chief economist at Allianz, described the US Federal Reserve's assertions that inflation would be temporary as "possibly the worst inflation call in Federal Reserve history."

While economists now expect inflation to persist, if inflationists are correct, the willingness of people in countries affected by high inflation and currency devaluation to gamble on cryptocurrency may increase.

If, as some have suggested, this is the start of a multi-year transition to higher inflation, it is possible that this factor will sustain demand for crypto for an extended period.

Demand for cryptocurrency may be as robust as the cryptocurrency markets.

Perhaps one of the most perplexing aspects of cryptocurrency is that it can be a thriving market. When the mood is bullish and the momentum is strong, large price increases and the emergence of alternate coins are the order of the day.

However, when that momentum shifts and prices fall for an extended period of time, the outcome can be far less rosy for cryptocurrency holders.

In December 2017, bitcoin reached an all-time high, nearly quintupling in less than three months. By the time the price reached its all-time low the following December, bitcoin's value had fallen by more than 84 percent.

While there is no doubt that the crypto markets have matured significantly since then, large withdrawals continue to be relatively common.

If global financial markets continue to experience significant declines, it's not difficult to envision crypto prices and broader sentiment in crypto declining, at least temporarily.

Perspectives

As the last few years have demonstrated, providing insight and prediction in this environment can be as difficult as a monkey throwing darts at a dart board.

However, on a more fundamental level, there are some things about which we can be reasonably certain.

Individuals in countries experiencing high inflation and currency devaluation will seek alternative means of protecting their wealth, whether through real estate, precious metals, or a venture into the world of cryptocurrency.

Finally, cryptocurrency is defined by its holders' psychology. While this is true for all asset classes to some extent, in the crypto world, the level of belief and emotion can cause sharp swings in market sentiment.

This may prove critical for future demand for crypto and serve as a litmus test for those considering crypto as a potential alternative in the face of continued declines in purchasing power.

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