Nigeria’s Bitcoin premiums may better reflect the country’s need for the dollar rather than cryptocurrency.
This week’s news focused on Nigeria’s bitcoin premiums, in which the cryptocurrency was listed on local trading platforms for 60% more than market rates. Although the bitcoin community hailed the news on social media, the rising bitcoin prices may not indicate increased demand for the commodity, but rather a sustained need for the US dollar as the country’s local currency weakens.
It all started when a number of media sites highlighted the high premiums, which they blamed to cash withdrawal limitations imposed by the Nigerian government on its residents while it worked on replacing old bank notes with new ones. However, the ATM withdrawal limitations were first set on December 6, last year, and the government had been gradually increasing the cap before doubling it in January.
If bitcoin demand increased as a result of the country’s cash crunch, premiums should have risen when ATM limitations were introduced in early December.
“But essentially, what we were seeing was just this constant premium,” said Conor Ryder, research analyst at digital asset data provider Kaiko, who examined prices going back a few days before the withdrawal limit was imposed and discovered that “the premium didn’t substantially increase at all” as a result of the ATM limit order.
Nigeria’s bitcoin premiums are not a new phenomena, and they often reflect gaps between the country’s official and unofficial US dollar exchange rates. Although the government sets the official rate, the dollar sells for substantially more in the local forex markets due to the country’s persistent currency depreciation problem.
Even though bitcoin pricing on international peer-to-peer networks like Paxful are determined using Nigeria’s official US dollar exchange rate, the unofficial rates may actually represent how most Nigerians obtain foreign cash – by paying a lot more naira per buck.
“That is the correct rate to use. And, using that rate, it’s scarcely sold at a premium. “I believe it’s fairly close to the price of bitcoin,” Ryder told CoinDesk in an interview.
He went on to say that the general reaction to the revelation of the increases was “a little overdone.” But it doesn’t mean Nigerians don’t pay more for anything.
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“They are paying a higher price. “It’s definitely more for the US dollar than bitcoin, which shows you they’re in a dire need, I assume, to migrate into a more stable currency like the US dollar,” Ryder explained.
However, the notion that premiums reflect bitcoin demand is not entirely wrong, as bitcoin premiums can be found in other areas like as South Korea, where the local currency is rather stable.
When there is a significant surge in demand for cryptocurrency in South Korea, and local selling prices in Korean won are converted back into US dollars, “you can see that they’re really paying a greater rate in their local currency than they would have in the US market,” Ryder explained.
None of this, however, diminishes the reality that Nigeria is a major crypto adopter. Its tech-savvy, young populace has embraced Web3 and has resorted to it in times of crisis, from rallies against police brutality to fighting inflation or government regulations.
So it’s hardly a leap to think how crypto, from bitcoin to dollar-backed stablecoins, may help alleviate Nigerians’ financial woes, according to Ryder.
“Bitcoin would solve some of the issues they’re facing with cash access,” he continued.
Read more: Crypto Is Quietly Thriving in Sub-Saharan Africa: Chainalysis Report
