Secret behind Bitcoin price behaving strangely in Nigeria
Notice when you surf for the price of bitcoin, you’ll probably notice that it varies depending on which platform you’re on. It will also change depending on the country you’re in – even after adjusting the local currency rate.
These variations in price will usually only be small, but in certain circumstances, they may be far greater. In Nigeria, for example, bitcoin is currently trading at a premium of almost 20%. While the bitcoin price recently surged up to $60K across most of the world, in Nigeria it super-surged to $86K.
This is certainly unusual, but such strange behavior is actually quite easy to understand when you know how the market works and what drives the price.
How the price of bitcoin is determined
Holarex doesn’t set the price of bitcoin or any cryptocurrency – no cryptocurrency exchange does. All an exchanger does is provide a platform to facilitate people buying and selling cryptocurrencies.
The price you pay, therefore, all comes down to supply and demand. If there are more people on a platform willing to sell bitcoin than there are to buy, the price will go down. If demand is higher than supply, the price will go up.
The total supply of bitcoin is fixed at 21 million and it is released at a consistent and known rate until it reaches that number. This is one of its main selling points. The supply will vary between exchanges, but the impact of that is usually fairly minimal on price. The big driver of price volatility will be swung in demand. These swings can be caused by a whole host of factors, from the introduction of new regulations to FOMO, and beyond.
Why the price can differ more between exchanges
Each exchange is essentially just its own unique marketplace where people who have bitcoin can sell to those who want it.
The price of bitcoin is therefore determined by what traders are willing to pay for it. The traders you find on each platform will be different, and will therefore set different prices. The price you see on Holarex.net will subsequently not be the same as the one you see on another exchange, in the same way, that if you go on eBay or Amazon and look for the latest iPhone, the prices will be slightly different.
In the same way that an iPhone will cost you roughly the same on Amazon and eBay though, market forces also mean that the price of bitcoin remains roughly similar between crypto exchanges. Traders can, after all, still see price movements on multiple platforms at once and move between them. There are correlations created by events such as arbitraging, for instance, whereby traders will buy bitcoin on one platform where it’s cheaper, then send it to another platform where it’s more expensive and sell it there. These usually keep the prices on exchanges broadly aligned.
The Central Bank of Nigeria’s (CBN) recent decision to ban financial institutions from working with cryptocurrency providers has changed this. This has essentially broken the arbitrage loop and created market inefficiencies that have removed that correlation between the exchanges. They’re now operating completely independently of one another and you’ll find the price can differ significantly as a result.
Why price differs between countries
In the same way that the price of bitcoin will differ between platforms, so too will it differ between different countries.
Traders in each country have different wants and need unique to the wider macroeconomic climate they find themselves in. Subsequently, demand for cryptocurrency will vary. To take Nigeria as an example, demand for bitcoin in the country has long been among the highest in the world. This is large because Nigeria is an inflationary country, and citizens have turned to bitcoin to weather value drops in Naira and protect their wealth by harnessing the power of a global economy.
This has always led to Nigerians paying a small premium for bitcoin, so in some ways, this recent premium is nothing new. However, the CBN’s decision has created new market inefficiencies that have caused even greater abnormalities in price.
Buying bitcoin is basically the only option for people looking to store their money, and the only means they have for sending money somewhere else. As a result, they’re willing to pay a higher price for it so they can use their capital. Sellers have a lot more power than is normal, so there’s an imbalance and they’re charging more.
Exchange rate issues
Due to the falling purchasing power of the Naira, on any given day, Nigeria has multiple exchange rates with the dollar. According to economist Koji Kubo, multiple exchange rates emerge within the unofficial market when governments implement “exhaustive exchange restrictions” or limitations on the amount of foreign currency that could be bought or sold.
This is true of Nigeria. In 2020, local media reported that Nigerian banks were limiting the number of dollars Nigerians can spend abroad to as low as $500. At the same time, Nigeria’s also facing a US dollar shortage. Thanks to the scarcity of dollars that could not meet local demand, the value of the Naira fell in local informal markets as people showed a willingness to pay more Naira per dollar.
This means NGN/USD exchange rates will also often vary wildly between platforms.
Financial freedom leads to more efficient markets
It’s not a coincidence that countries with the highest BTC valuations consistently score lower on investment and financial freedom global rankings. Strict government controls create additional risks and costs for local currency conversion and remittance.
It’s therefore likely that Nigerians will continue to pay a premium for bitcoin until they make changes to the system and the market will continue to exhibit unusual behaviors.
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