Nigeria’s naira weakness makes cryptocurrencies attractive for its middle-class
Tired of waiting for the economy to get better many of Nigeria’s middle-class population are leaving to greener pastures in Canada, UK, and Australia.
However, for those who decide to stay, survival is a battle of the wits. It is a struggle to shore up personal income and escape the widening poverty net that has drawn in over 80 million people according to data from the National Bureau of Statistics (NBS). In doing this, Nigeria’s middle-class is in an unending search for alternative investment assets that are attractive and can guarantee consistent cash inflow.
Nigeria faced an exchange rate crisis in the first quarter of 2020 triggered by a fall in oil prices. COVID-19 which was declared a pandemic in March 2020 did not help matters as it exacerbated the forex scarcity and threw most of the world into an existential crisis. By August, the Central Bank of Nigeria (CBN) issued a circular authorizing and instructing dealers to sell forex to end-users at N386/$1. In December, the exchange rate between the naira and dollar depreciated to N410.25$1 at the official NAFEX window on 31 December 2020 ending a tumultuous year for the currency market.
The economic meltdown also meant that returns on investment from traditional assets like mutual funds, treasury bills, stocks, and bonds declined.
In recent times, many Nigerians have turned to the cryptocurrency market which has displayed resilience throughout 2020 and beyond. Cryptocurrencies have been the top-performing asset class over the last decade with their total market value increasing from $193 billion in January 2020 to over $1.3 trillion as of 13 February 2021.
Data from Blockchain. com showed that Bitcoin rose from $0.06 in September 2010 to close at $22,700 in December 2020, representing a growth of over 37 million percent in a span of 10 years.
The promise of return on investment and their potential to ease the stress Nigerians in the diaspora go through to make remittance is part of the drivers of large adoption by the middle-class in Nigeria.
A recent tweet by Changpeng Zhao, founder and CEO of Binance showed that the exchange recorded an all-time high of $80 billion daily trading volume on 4 January.. Paxful, the largest peer-to-peer (P2P) platform in the world, also said in its report that Nigeria is currently the top P2P country in Africa on its platform. The country is second in the world on P2P on Paxful.
Experts say Nigeria’s middle-class plays a major role in the growth of the cryptocurrency market in the country for different reasons including the weakness of the naira.
According to the World Bank, the middle class includes individuals and households that fall between the working class and the upper class within a societal hierarchy. They have a higher proportion of college or university degrees than those in the working class, more income available for consumption, and may own a property. They are often employed as professionals, managers, and civil servants. The United Nations ranks a middle class as a person who lives on $10 to $100 whereas the African Development Bank (AFDB) which focuses on the African continent, measures the middle as those who live on $2 to $20 a day. In Nigeria, the middle class account for over 20 percent of the population
“A strong middle class is the backbone of the economy, they are the significant spenders and every economy depends on the spending power of the consumers,” Roman Oseghale, founder and CEO of Intelserve Inc, a Canadian-based business analysis company, said.
Eloho Omame, managing director and CEO of Endeavor told Businessday that bitcoin, the largest cryptocurrency in the world by valuation, was designed to provide a perfect, non-inflationary option.
“Because mathematically, there is a finite number of bitcoins that can ever exist, and also because bitcoin issuance (or “mining”) is decentralised, the idea is that no single government can control bitcoin supply, and therefore individual wealth (in theory at least) is preserved in bitcoin as a better store of value to historical safehavens, like US dollars or gold,” Omame said.
The naira devaluation is not expected to improve any time soon according to a survey of investors and analysts released in January by Bloomberg. Instead of getting stronger, the currency is projected to weaken further by 10 percent due to a lingering dollar shortage. Out of 17 respondents, eight predict a devaluation of between 5 percent and 10 percent in 2021. Five saw a devaluation of more than 10 percent and the remaining four predicted a markdown of as much as 5 percent. The median of analysts’ estimates projects the naira at $426.5 by the end of 2021.
A further weakening of the currency adds more pressure on the income of the middle class and also increases their search for alternative assets like cryptocurrencies, says Kalu Ajah, a personal finance expert.
Economists at European Business Review also say increased adoption of cryptocurrency could lead to development in emerging countries like Nigeria. These developments could come in increased financial inclusion and other social infrastructure. The economists suggested that the adoption of cryptocurrencies has helped people in these countries connect with the outside world. It also increased the spending power of citizens which in turn benefits the economy in terms of the personal income tax the government generates.