Due to the limited supply of Dollar, Nigeria investors and business owners have adopted cryptocurrencies to buy the imports that are the bedrock Nigeria’s economy.
Recall that at the weekend dollar sold for N500/$ at the black market.
With the price of oil, the country’s main export, depressed and foreign exchange reserves dropping, the central bank is holding on to scarce foreign currencies in its coffers in order to shore up the naira.
A cryptocurrency is a digital asset designed to work as a medium of exchange wherein individual coin ownership records are stored in a ledger existing in a form of computerised database using strong cryptography to secure transaction records and to control the creation of additional coins.
Cryptocurrencies use decentralised technology to let users make secure payments and store money without the need to use their name or go through a bank. They run on a distributed public ledger called blockchain, which is a record of all transactions updated and held by currency holders.
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The naira has been experiencing a steady fall for many weeks now. For instance, by 1.05 percent on Tuesday, August 18, 2020, to a low of N480 to the dollar on the black market, while it was N500 by the weekend.
Similarly, the Pound Sterling exchanged for N610 and the Euro traded for N550.
However, as the naira continues its free fall, the CBN has refused to dispense forex to investors and importers as it is fighting against a depletion of the nation’s foreign exchange reserves which currently stands at around $35.6 billion.
Holders of Nigerian bonds and equities may have as much as $2.5 billion trapped in the country, Simon Kitchen, an analyst with EFG Hermes, said in a note to investors last week.
According to Ayodele Salami, who is the Chief Investment Officer at Duet Group, “We’ve been investing across African markets for about 15 years. And in 15 years, Nigeria is the only place where twice in less than five years you have a lockdown or a complete freeze of the foreign exchange market.”
What this means is that foreign investors who want to buy into the Nigerian market can’t move their cash out.
Significantly, around the world, the acceptance and utilisation of blockchain technology and its underlying cryptocurrencies has become more imperative. With the surge in the number of bitcoin (BTC) and altcoin users, it could be presumed that people are now more aware of the possibility of attaining financial autonomy.
For economies with fiat currencies that are prone to frequent devaluation like Nigeria, the embrace of digital currencies has grown in recent times. A recent survey from statista.com, encompassing 65 countries, showed that Nigerians were the most likely to say they used or owned cryptocurrency. The oil-rich sub-Saharan African nation topped the chart with 32 percent.
Effort Etinosa Onoboh, an independent bitcoin trader and investor, said the ranking is “nothing unexpected” as the masses are recognising the revolutionary capabilities of blockchain technology.
He said: “Stiffened regulations, coupled with the subtle and incessant devaluation of the naira, have made cryptocurrencies a viable option for all.”
In a country that is import-dependent, the central bank, in its powers, is always revising the dollar spend limit both home and abroad, and Onoboh believes that these restrictions will always “hinder businesses and transactions”. This is a major reason why people turn to cryptocurrencies as the best alternative.
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Lukman Otunuga, senior research analyst at FXTM, said sentiment towards Nigeria, the largest economy in Africa, remains fragile, thanks to dollar scarcity, shaky oil prices, and external risks in the form of US-China tensions.
Nigeria is still expected to contract by 5.4 percent, according to the International Monetary Fund (IMF), thanks to COVID-19, while inflation continues to rise on the back of continued border closures and the lingering effects of coronavirus-induced supply disruptions.
It is the same story outside of Nigeria with other emerging markets and developed countries nursing deep wounds from lockdown restrictions. At best, the outlook for the rest of 2020 remains clouded by uncertainty.
Investors may be offered some clarity over how Nigeria fared in Q2 when Gross Domestic figures are released on Wednesday, August 26. With economic growth in the United States plunging 32.9 percent in Q2, the UK contracting 20.4 percent and even South Africa’s growth projected to tank as much as 40 percent last quarter, it will be interesting to see how Nigeria performed. An economic contraction is widely expected, the question is how deep?
Otunuga believes that last week was another phenomenal trading week for global markets with U.S. equity bulls stealing the show by propelling the S&P 500 to all-time highs on Wednesday and the tech-heavy Nasdaq joined the party overnight, making a record despite growing signs of economic weakness, but some emerging markets were not invited to the party with the Nigerian stocks struggling for direction this week.
The Nigeria Stock Exchange All Share Index (ASI) is still down almost 6 percent year-to-date despite the S&P 500 and Nasdaq, both hitting record highs. Although global equity bulls continue to derive strength from unprecedented central bank support and handsome fiscal packages, this liquidity-fuelled rally has been unable to find its way into Nigerian markets.