Why is Bitcoin Trading at $37,899 in Nigeria?

Nigeria’s failing monetary policies have made it Africa’s leader in crypto adoption. With the latest CBDC push and cash restrictions, Bitcoin now goes in the country for premium demand, at 60% above the world’s marketplaces. Or does it?

Nigerian Bitcoin Stands Out By a Large Margin

According to this week’s data from NairaEx, a top Nigerian crypto exchange, one Bitcoin (BTC) is trading for 17,453,455 Nigerian Naira (NGN), or $37,899. This makes Nigerian Bitcoin 63.41% more expensive than the one available on Binance, the world’s largest crypto exchange. 

On Nigeria’s LocalBitcoins, the Bitcoin price difference is even more drastic. This peer-to-peer aggregator has offered 28 million NGN per 1 BTC, or $60,900, a 164.61% Bitcoin premium. There are multiple reasons a currency can trade at a “premium” on one exchange compared to others.

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

Combined with an active market for cryptocurrencies, and a large population of experienced investors, this creates a high demand that outpaces low liquidity on Korea’s exchanges. Interestingly, this arbitrage opportunity is how notorious crypto fraudster Sam Bankman-Fried got started with Alameda Research before launching FTX.

“Many found a way to do it for small size. Very, very hard to do it for big size, even though there are billions of dollars a day volume trading in it because you couldn’t offload the Korean won easily for non-crypto.”

Sam Bankman-Fried, from Bloomberg

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

Parallel Dollar Exchange Rate Generates Premium BTC Illusion

According to Nigeria’s local news site, Mariblock, Nigeria has two exchange rates for the dollar. On the one hand, the Central Bank of Nigeria (CBN) lists $1 at 460 NGN, which delivers the Bitcoin premium calculated above. However, when looking at USD/NGN exchange rates from parallel money transmitters, such as Bureaux de Change (BDC), the rate is 750 NGN per dollar.

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

With that said, Nigeria’s premium Bitcoin could materialize in the future in the traditional Korean way. 

What is Nigeria Doing to Drive Bitcoin Adoption

At 213 million citizens and $2,085 GDP per capita, which is 33x lower than in the US, Nigeria is rated as a developing country. This includes a staggering unemployment rate of one-third of the country or 33%. 

Yet, Nigeria is rich in oil, providing 95% of Nigeria’s foreign exchange earnings and 80% of its budgetary revenue. Similar to oil-rich Venezuela, it seems that the Nigerian government has trouble allocating some of that revenue to bolster its economy. This is evident from the steady decline of the Nigerian naira (NGN) over the last five years.

Nigeria’s inflation rate increased to 21.34% in 2022, which is significantly above the average for emerging and developing economies at 10.6%. In the meantime, mobile internet user penetration hit 37.34% last year or over 80 million people. 

This went hand-in-hand with Nigeria’s rapid crypto adoption to tackle the naira’s decreased buying power. According to Chainalysis, Nigeria is ranked 11th on the overall crypto adoption index. Interestingly, Nigeria’s P2P exchange trade volume ranking is above centralized exchanges, at 17th vs. 18th, respectively.

This could drive Bitcoin’s demand high enough to outpace the supply on Nigeria’s exchanges.

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Nigeria’s Central Bank Hostile Toward Crypto

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

“There was an initial shock, but water will always find its path and the young people found P2P — the volume [of transfers] they were conducting through banks has been shifted [to P2P], so the banks no longer get those transactions’ fees,”

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

In a further move to bolster the Nigerian naira and take control over 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, the adoption has been abysmal. According to Bloomberg, only 1 in 200 Nigerians has been using the new CBDC.

Even before the CBDC launched, the Nigerian government coordinated with mobile cell companies to lay the groundwork by linking users’ SIM cards to national identity numbers (NINs). Just like in the EU, a digital ID would then be tied to digital wallets. This, too, was not well received.

In a more aggressive move to entice eNaira usage, the central bank issued a decree on December 6th, 2022, to limit ATM withdrawals – $45 (20,000 Nigerian nairas) per day and $225 (100,000 nairas) per week. Moreover, Nigerians were hit with a 5% fee if they exceeded that limit. Businesses are capped at ₦500,000 ($1,123) per week, with a 10% extra fee if they go over.

Finally, the Nigerian central bank is issuing higher denominations of ₦200, ₦500, and 1000 naira banknotes to swoop up excess cash liquidity. This is another vector for CBDC adoption, as hoarded physical cash is rendered worthless by the January 31st deadline.

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