Key points to remember
- Bitcoin is trading at $38,000 in Nigeria, a premium of 66%.
- The Nigerian central bank has implemented ATM withdrawal limits of $43 a day to push towards a cashless society for Africa’s largest economy.
- The central bank also announced a card scheme competing with Visa and Mastercard, in an effort to reduce fees.
- Some are excited about the push into bitcoin, but it’s important to remember bitcoin’s failures here too, writes our analyst Dan Ashmore.
- Internet penetration is only 35% in Nigeria, while Bitcoin’s volatility means it would be idealistic to assign it any kind of “hedging” role.
And Bitcoin is trading around $38,000 in Nigeria.
The price can be seen on the Nigerian NairaEx exchange, where it is listed at 17.8 million naira. This equates to $38,600, despite Bitcoin’s market price of $23,200, which means it is trading at a 66% premium in Nigeria.
Nigeria is moving to a cashless society
The bounty comes at a time when the Nigerian central bank is taking a big step towards a cashless society.
Limits on ATM withdrawals have been put in place, with citizens limited to withdrawing 20,000 naira per day ($43 at current rates) and 100,000 naira per week ($217).
Nigeria’s Controversial Money Management
The central bank also this weekend extended the deadline for citizens to exchange old banknotes from Jan. 24 to Feb. 10. The higher denomination naira notes had been designed with the aim of reducing counterfeiting and the use of cash in society.
The move was widely criticized, with analysts pointing to a very obvious question: how does issuing new banknotes reduce the use of cash? Nigeria is Africa’s largest economy and remains highly dependent on cash.
Apart from general questions, Nigerians lamented that they had not had enough time to adapt. There were many stories of queues at banks, as many of Nigeria’s 210 million people live in rural areas and have no access to banks, where they have to exchange old notes for new ones. .
The government had announced a scheme just a week before the deadline to help people in these rural areas via bank representatives, but controversy persisted that there was not enough time. Shortages of new tickets have also been reported, with commercial lenders not getting their hands on new tickets until less than a month before the deadline.
“I don’t have good news for those who think we should move the deadline; my apologies,” central bank governor Godwin Emefiele said last Tuesday.
Nevertheless, the central bank finally relented, with political pressure mounting ahead of presidential elections in a few weeks.
Could Bitcoin help Nigeria?
The chaotic developments are just the latest example of the mismanagement of money by governments around the world. Nigeria has also been no stranger to inflation historically.
Zooming into 2022 shows that the past year has seen the currency devalue at a significantly higher rate than most developed economies around the world.
In this context, the central bank also announced the launch of a domestic card system last week. The aim is to create competition for Visa and Mastercard, again pushing Nigeria towards a cashless society while saving the country from overseas transaction fees.
The goal may be admirable, but the realities of the situation make the push difficult. As mentioned above, it is still a hugely cash-dependent society, with much of the population excluded from banks.
Some Bitcoiners mention cryptocurrency as the solution for Nigerians. To me, that seems a bit idealistic. While there is no doubt that Bitcoin is extremely accessible compared to banking services in developed countries, it still requires an internet connection. And in Nigeria, it’s not as readily available.
While Bitcoin’s fundamentals certainly make it attractive in the context of a currency under tight control and with a historical flirtation with inflation, let’s not overlook the fact that Bitcoin has its own issues.
A bitcoin was worth $68,000 just over a year ago. Then it was $16,000 towards the end of last year. Now it’s $23,200. For those living in rural areas of Nigeria, this volatility would be grueling and makes it simply totally unachievable at the moment, despite the clamor of bitcoin enthusiasts.
I think – and I’ve written about it extensively before – Bitcoin has some really intriguing attributes when it comes to developing economies and currency crashes, and what could happen if the asset continues to mature.
However, in 2023, it is an extreme risk asset that could not be less suitable for storing wealth. The Naira may be feeling over 20% inflation right now, but Bitcoin can halve its price by 50% in just one day.
Why is the Bitcoin premium so high?
The way I like to think of it is like the Big Mac index with purchasing power parity. A fun metric for gauging a country’s price, the Big Mac Index compares the price of the universal good that is McDonald’s most famous burger from country to country.
In the same way, looking at the price at which Bitcoin is trading can provide clues to how well a nation’s money is functioning. The 66% premium in Nigeria clearly highlights that there is real turmoil in the economy. Citizens are willing to pay such a huge margin to withdraw their money from Naira.
Again, there could be other factors at play. The Kimichi premium has persisted for many years, describing the consistent premium that could be seen in the Korean bitcoin market. This was primarily the result of regulatory issues surrounding the ever-controversial Bitcoin.
If nothing else, this story from Nigeria shows how fragile much of the world is when it comes to money. With these episodes occurring more and more regularly, as well as those in Argentina, Lebanon, Turkey, etc., it is no surprise that there is a growing demand for the mysterious decentralized asset that we all call Bitcoin.
But to claim that Bitcoin is anything close to a solution right now would be naïve. As for the future, who knows?
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