Bitcoin has already passed the $ 68,000 mark in Nigeria, but if you use the official exchange rate.
Awosika Ayodeji, a Nigerian blockchain project designer, isn’t complaining. He’s happy to wake up to see Bitcoin prices quoted with unofficial U.S. dollar exchange rates because that means he would get more naira per dollar if he converted his crypto earnings to his local currency.
At the same time, however, “buy [bitcoin] will also be more expensive, ”noted Ayodeji.
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On Friday, Nigeria’s official exchange rate for the US dollar was around 380 naira per dollar. At that rate, a bitcoin listing on the peer-to-peer platform LocalBitcoins in Nigeria was converted from around 26,000,000 naira to $ 68,246. On the surface, this looks like a hefty 24% premium, which in this context indicates that Bitcoin price is much higher in certain locations than the global average.
In Nigeria these premiums are inconsistent. On the Paxful peer-to-peer platform, the Bitcoin prices listed were based on a trade of USD 1 for around 475 naira. That rate has been converted to $ 54,736, a price much closer to the average Bitcoin trading price of the day. In fact, the informal market dollar exchange rate in Nigeria was 478 naira on Friday, reflecting the rate observed on Paxful and the bitcoin prices reported on LocalBitcoins.
In emerging markets facing a currency crisis, Bitcoin prices can actually provide information about the informal market for US dollars. In Argentina, the Latin American crypto exchange Bitso listed the Bitcoin price at 8,700,993 Argentine pesos on Friday, which turned into a whopping 98,000 US dollars at the official exchange rate, which was around 89 Argentine pesos per dollar. However, Bitcoin quotes on exchanges like Bitso indicated that the dollar was worth around 150 pesos, which reflected the informal rate of the dollar.
Yele Badeosi, CEO of Bundle Africa’s social payments app, said the exchanges are most likely using informal dollar rates, thereby increasing the price of bitcoin in local currency. According to Andrés Ondarra, Country Manager for Argentina at Bitso, the market exchange rate for the dollar is also usually higher than the official exchange rate in Argentina.
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“This mainly reflects the difference between the informal and the official US dollar exchange rate. The gap between the official and informal dollar in Argentina is around 70%, ”Emiliano Limia, spokesman for the Argentinian crypto exchange Buenbit, told CoinDesk via email.
Exchanges using informal rates instead of official rates indicate that the local Bitcoin markets exist outside of state regulations and that Bitcoin trading may reveal the true value of the local currency against the dollar.
According to Gina Pieters, professor of economics and the University of Chicago, who published an article on how Bitcoin can detect exchange rate manipulation and capital controls, Bitcoin rewards can be incurred for a number of reasons.
“It is unlikely that the price should be that much higher unless the nominal exchange rate channel is manipulated,” Pieters said in an email to CoinDesk, referring to the price of one currency in relation to another.
In fact, the thesis of Pieters’ 2016 paper was that bitcoin trading can be used to approximate unofficial exchange rates, “which in turn can be used to admit both the presence and extent of the distortion caused by capital controls and exchange rates detect manipulations. “
Informal exchange rates
Due to the declining purchasing power of the naira, Nigeria has multiple exchange rates for the dollar every day. Informal exchange rates tend to be much weaker as Nigerians have to spend more naira per dollar, indicating that the local currency may be worth less than the government claims.
According to a chapter in Koji Kubo’s book on the foreign exchange market in Myanmar, multiple exchange rates arise in the unofficial market when governments impose “exhaustive exchange rate restrictions” or limits on the amount of foreign currency that can be bought or sold.
In 2020, the Argentine government imposed strict controls on the purchase of US dollars and limited the amount that citizens could buy and hold to $ 200 to prevent capital from flowing out of the country. As a result, the dollar black market flourished, and people made efforts to buy more dollars to protect their assets, even paying more pesos per dollar. This quickly carried over to crypto as Argentines tried to get rid of the peso for stronger currencies: the demand for bitcoin spiked in 2020.
Meanwhile, Nigeria is facing a US dollar shortage: in 2020, local media reported that Nigerian banks limited the amount Nigerians can spend abroad to just $ 500. Thanks to the scarcity of dollars that could not meet local demand, the value of naira in local informal markets fell as people were willing to pay more naira per dollar.
“The general market is now pricing the price at $ 480 as that appears to be the present value that is widely accepted between buyers and sellers,” Ayodeji said.
The lower informal exchange rate may mean that sending money to families in Nigeria or Argentina in Bitcoin can be beneficial as a Bitcoin can get you more of the local currency. However, this also means that the purchasing power of the local currency is weakening. Sending money outside of the country can be problematic as it converts your wealth into fewer dollars.
It is usually difficult to estimate local informal dollar rates: Ayodeji said black market currency traders may charge even more naira per dollar. But bitcoin conversions can work out a decent estimate, Ayodeji said.
Even so, premiums may still exist even if you take the exchange rate difference into account. One possible reason is that in countries with high inflation, people may be willing to pay more for bitcoin.
“In the Eurozone, prices are almost the same as spot prices on major central exchanges,” said Jukka Blomberg, Marketing Director at LocalBitcoins, in an email. But “in countries like Venezuela there can be quite high premiums.”
Blomberg explained this because Venezuelans willing to sell their Bitcoin in exchange for their local currency usually want a higher premium due to the risk they have to take in accepting a highly inflationary currency like the bolivar. In Venezuela, where inflation reached a staggering 10 million% in 2019 and the value of the bolivar against the US dollar fell almost daily, people turned to Bitcoin. In fact, local demand for bitcoin has fueled the adoption of crypto in Venezuela ahead of other hyperinflationary countries like Argentina.
Nigeria is also an inflationary country and citizens have turned to Bitcoin to bring the weather value down in Naira. The demand for Bitcoin was so high that the Central Bank of Nigeria first ordered banks to close all accounts associated with crypto trading and issued a five-page statement outlining the measures taken to protect the country’s financial system.
Ayodeji said the naira exchange rate on crypto platforms changed drastically in the days after the ban was announced, possibly due to the following panic and slightly falling demand for Bitcoin: The unofficial exchange rate hit between 410 and 420 naira per dollar, Ayodeji said.
“But the market was circling,” he said.