Neither the author, Tim Fries, nor this website, The Tokenist, provide financial advice. Please refer to our website policy before making financial decisions.

Nigeria’s failed monetary policies have made it Africa’s leader in cryptocurrency adoption. With the latest cash restrictions and CBDC push, Bitcoin is now entering the country on premium demand, at 60% above world markets. Or if?

Nigerian Bitcoin Stands Out By A Wide Margin

According to data this week from NairaEx, one of Nigeria’s leading cryptocurrency exchanges, one Bitcoin (BTC) is trading at 17,453,455 Nigerian Nairas (NGN), or $37,899. This makes Nigerian Bitcoin a 63. 41% more expensive than what is available on Binance, the world’s largest cryptocurrency exchange.

At Nigerian LocalBitcoins, the difference in Bitcoin price is even more drastic. This peer-to-peer aggregator has offered 28 million NGN for 1 BTC, or $60,900, a Bitcoin premium of 164.61%. There are multiple reasons why a currency may trade at a “premium” on one exchange compared to others.

Previously, South Korea has been a leader in this phenomenon, called premium Kimchi after the traditional Korean dish. The main reason for Korea’s Bitcoin premium is its strict capital controls, making it difficult for investors to move money across borders.

Combined with an active cryptocurrency market and a large population of experienced investors, this creates high demand that outweighs the low liquidity on Korean exchanges. Interestingly, this arbitrage opportunity is how notorious cryptocurrency scammer Sam Bankman-Fried got his start with Alameda Research before launching FTX.

“Many found a way to do it for small size. It’s very, very difficult to do it for a large size, even though there’s billions of dollars of trading volume a day because you can’t offload the Korean won easily for non-crypto.”

Sam Bankman-Fried of Bloomberg

Nigeria has its premium drivers from Bitcoin, but it is compounded by the USD exchange rate itself.

Parallel Dollar Exchange Rate Generates BTC Premium Illusion

According to local Nigerian news site Mariblock, Nigeria has two exchange rates for the dollar. On the one hand, the Central Bank of Nigeria (CBN) quotes $1 at 460 NGN, which offers the Bitcoin premium calculated above. However, when looking at USD/NGN exchange rates from parallel money transmitters such as bureaux de change (BDCs), the rate is 750 NGN per dollar.

This would bring the price of Bitcoin in line with the rest of the world at $23,271. Therefore, it appears that Nigerian exchanges base their Bitcoin prices on parallel market rates. However, this shadow money market manifests Nigeria’s heavy-handed capital control, making it extremely difficult to buy dollars at the official CBN exchange rate.

That being said, Nigerian premium Bitcoin could materialize in the future in the traditional Korean way.

What is Nigeria doing to boost Bitcoin adoption?

With 213 million citizens and a GDP per capita of $2085, which is 33 times lower than the US, Nigeria is classified as a developing country. This includes a staggering unemployment rate of one third of the country or 33%.

However, Nigeria is rich in oil, providing 95% of Nigeria’s foreign exchange earnings and 80% of its budget revenue. Like oil-rich Venezuela, the Nigerian government appears to be having trouble allocating some of that revenue to boost its economy. This is evident from the steady decline of the Nigerian Naira (NGN) over the past five years.

Nigerian Naira (NGN) against the dollar for five years. Image Credit: Business View

Nigeria’s inflation rate increased to 21.34% in 2022, which is significantly above the emerging and developing economy average of 10.6%. Meanwhile, the penetration of mobile Internet users reached 37.34% last year or more than 80 million people.

This went hand-in-hand with Nigeria’s rapid crypto adoption to address the declining purchasing power of the naira. According to Chainalysis, Nigeria ranks 11th in the overall cryptocurrency adoption index. Interestingly, Nigeria’s P2P exchange trade volume ranking is above centralized exchanges, coming in at 17th vs 18th, respectively.

This could drive demand for Bitcoin high enough to outpace supply on Nigerian exchanges.

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Nigerian central bank is hostile towards cryptocurrencies

In February 2021, the country’s central bank exacerbated the liquidity situation by banning commercial banks from trading exchanges. This move by the Central Bank of Nigeria diverted crypto flows to P2P transactions.

“There was an initial shock, but the water will always find its way and the young people found P2P: the volume [of transfers] that they were carrying out through the banks has moved [to P2P]so banks no longer charge fees for those transactions.”

Adedeji Owonibi, CEO of Convexity for S&P Global Market Intelligence

In a further move to bolster the Nigerian naira and take control of the money supply, the central bank launched the central bank digital currency (CBDC) in October 2021 – eNaira. However, as eNaira simply expresses a devaluing fiat currency in digital form, adoption has been dismal. According to Bloomberg, only 1 in 200 Nigerians have been using the new CBDC.

Even before the launch of the CBDC, the Nigerian government coordinated with mobile phone companies to lay the groundwork by linking users’ SIM cards with National Identity Numbers (NINs). Just like in the EU, a digital ID would be linked to digital wallets. This was also not well received.

In a more aggressive move to attract the use of eNaira, the central bank issued a decree on December 6, 2022 to limit ATM withdrawals: $45 (20,000 Nigerian Naira) per day and $225 (100,000 Naira) per week. . Additionally, Nigerians received a 5% fee if they exceeded that limit. Businesses are capped at ₦500,000 ($1,123) per week, with an additional 10% fee if exceeded.

Finally, the central bank of Nigeria is issuing higher denominations of ₦200, ₦500 and 1000 naira notes to absorb excess cash liquidity. This is another vector for CBDC adoption, as accumulated physical cash loses its value before the January 31 deadline.

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Do you think the digital dollar/euro will face similar adoption hurdles when they come online? Let us know in the comments below.

About the Author

Tim Fries is the co-founder of The Tokenist. He has a B.Sc. in Mechanical Engineering from the University of Michigan and an MBA from the University of Chicago Booth School of Business. Tim served as a Senior Associate in RW Baird’s US Private Equity investment team and is also a co-founder of Protective Technologies Capital, an investment firm specializing in detection, protection and control solutions.