- Bitcoin is Trading at $38,000 in Nigeria, a Premium of 66%
- Nigeria’s central bank has implemented an ATM withdrawal limit of $43 per day in a push for Africa’s largest economy towards a cashless society.
- The central bank also announced a rival card system to Visa and MasterCard to reduce fees.
- Some are excited by the move to bitcoin, but it’s important to remember bitcoin’s failures here too, writes our analyst Dan Ashmore.
- Internet penetration in Nigeria is only 35%, while bitcoin’s volatility means assigning it any sort of “hedge” role would be utopian.
One Bitcoin Trading north of $38,000 in Nigeria.
The price can be found on Nigerian exchange NairaX, where it is quoted at 17.8 million Naira. This equates to $38,600, even though bitcoin is trading at $23,200 across the market, meaning it is trading at a 66% premium in Nigeria.
Nigeria moving towards a cashless society
The premium comes at a time when the Nigerian central bank is making a big push towards a cashless society.
Limits have been imposed on ATM withdrawals, with citizens limited to 20,000 naira ($43 at current rates) per day and 100,000 ($217) per week.
Nigeria’s controversial wealth management
The central bank has extended the deadline for citizens to exchange old banknotes from January 24 to February 10 later this week. Higher denomination naira notes were created with the goal 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 the largest economy in Africa and heavily dependent on cash.
Apart from big-picture questions, Nigerians lamented that they were not given enough time to switch to the new notes. Stories of queues at banks abounded, while many of Nigeria’s 210 million people live in rural areas with no access to banks, exchanging old notes for new ones.
The government announced a plan to help such rural areas through banking correspondents only a week before the deadline, but disputes persisted that there was not enough time. There were also reports of a shortage of the new notes, with commercial lenders getting their hands on the new notes less than a month before the deadline.
“I don’t have good news for those who feel we should change the deadline; My apologies”, central bank governor Godwin Emefile said just last Tuesday.
Nevertheless, the central bank eventually caved in as political pressure mounted ahead of the presidential election in just a few weeks.
Can bitcoin help Nigeria?
The chaotic developments are the latest example of how governments around the world often mismanage money. Historically also Nigeria has been no stranger to inflation.
Zooming in on 2022 shows that last year the currency devalued at a much higher rate than most developed economies around the world.
In this backdrop, the central bank also announced the launch of a domestic card scheme last week. The goal is to create competition for Visa and Mastercard, again pushing Nigeria towards a cashless society while saving the country on foreign transaction fees.
The goal may be laudable, but the realities of the situation make it difficult to pursue. As mentioned above, this is a society that is still heavily dependent on cash, leaving a large proportion of the population unbanked.
Some bitcoiners are pointing to crypto as a solution for Nigerians. To me, this sounds a bit idealistic. While there is no doubt that bitcoin is extremely accessible compared to banking in developed countries, it still requires an internet connection. And in Nigeria, it is not readily available as desired.
While bitcoin’s fundamentals certainly make it interesting in the context of a currency under severe control and one with a historic flirtation with inflation, let’s not lose sight of the fact that bitcoin has its own issues.
One bitcoin cost $68,000 a year ago. Then it was $16,000 at the end of last year. Now it is at $23,200. For those living in rural Nigeria, this volatility would be back-breaking, and completely unforgivable right now, despite the clamor from bitcoin enthusiasts.
I think – and have written extensively about this before – that bitcoin has really interesting characteristics in relation to developing economies and declining currencies, and what could happen if the asset continues to mature.
However, in the year 2023, it is a highly risky asset that may be less suitable to store one’s wealth. Naira is experiencing 20%+ inflation right now, but bitcoin could reduce its value by 50%. In one day.
Why is bitcoin’s premium so high?
The way I like to look at it is like the Big Mac Index with purchasing power parity. A fun metric to gauge how expensive a country is, the Big Mac Index compares the price of the universal item, McDonald’s most famous burger, from country to country.
Similarly, looking at the price at which bitcoin trades can give an indication of how well a country’s money is performing. The 66% premium in Nigeria clearly shows that there is some real turmoil in the economy. The willingness of citizens to pay such a huge markup to get their cash out of Naira is shocking.
Then again, there may be other factors at play. The Kimichi premium has been famous for many years, describing the continuous premium that can be seen in the Korean bitcoin market. This was primarily a result of regulatory issues surrounding the always-controversial bitcoin.
If nothing else, this story from Nigeria shows just how fragile the world is when it comes to money. With these episodes happening regularly in Argentina, Lebanon, Turkey and others, it is no surprise that there is a growing demand for the mysterious, decentralized asset we all call bitcoin.
But to claim bitcoin is close to a solution right now would be naive. For the future, who knows?