Nigeria’s bitcoin premiums – where the cryptocurrency was listed on local trading platforms for 60% above market prices – made headlines this week. Although the news was celebrated by the bitcoin community on social media, the inflated bitcoin prices may not reflect a heightened demand for the asset but a continued demand for the U.S. dollar as the country’s local currency suffers.
It all started when a number of media outlets drew attention to the high premiums, which they attributed to cash withdrawal limits placed by the Nigerian government on its citizens as it worked on swapping old bank notes for new ones. But the ATM withdrawal limits were initially imposed on Dec. 6 last year, and the government had been easing the limit since before doubling down again in January.
If bitcoin demand went up as a result of the cash jam in the country, the premiums should have spiked as the ATM limits were imposed in early December.
“But essentially, what we were seeing was that it was just this constant premium,” said Conor Ryder, research analyst at digital asset data provider Kaiko, who looked at prices going back to a few days before the withdrawal limit was imposed and saw “the premium didn't substantially increase at all,” as a result of the ATM limit order.
Nigeria’s bitcoin premiums are not a new phenomenon and they typically reveal the discrepancies between official and unofficial U.S. dollar exchange rates in the country. Although the government sets the official rate, thanks to the country’s chronic currency devaluation problem, the dollar sells for much higher on unofficial local forex markets.
Even if the bitcoin prices on international peer-to-peer platforms such as PAXFUL are calculated based on Nigeria’s official U.S. dollar exchange rate, the unofficial rates may actually reflect how most Nigerians are accessing the foreign currency – by dishing out a lot more naira per buck.
“That's really the rate to use. And if you use that rate, it's barely traded at a premium at all. I think it's quite close to the price of bitcoin,” Ryder said during an interview with CoinDesk.
He added that the overall reaction to the news of the premiums might have been a “bit overblown.” But that is not to say Nigerians aren’t paying more for something.
Read more: In Nigeria, One Bitcoin Can Cost $68,000. Here's Why.
“They are paying a premium. It's just probably more for the U.S. dollar rather than bitcoin, which tells you they're in a kind of desperate need, I guess, to move into a more stable currency like the U.S. dollar,” Ryder said.
But the logic that premiums indicate bitcoin is in demand isn’t exactly flawed either because bitcoin premiums show up in other markets like South Korea, where the local currency is comparatively stable.
When there is a dramatic increase in demand for crypto in South Korea, and when local selling rates in Korean won are converted back into U.S. dollars, “you're seeing that they're actually paying a higher rate in their local currency than they would have been in the U.S. market,” Ryder said.
None of this, however, takes away from the fact that Nigeria is a big crypto adopter. Its tech-savvy, young population has embraced Web3 and has, in times of trouble – from protests against police brutality to combating inflation or government controls – turned to crypto as an alternative to naira.
So it’s not a stretch to imagine how crypto – from bitcoin to dollar-backed stablecoins – could play a role in mitigating Nigerians’ currency troubles, Ryder said.
“Bitcoin would fix some of the problems that they're having with access to cash,” he added.
Read more: Crypto Is Quietly Thriving in Sub-Saharan Africa: Chainalysis Report