Why Bitcoin Has Achieved "Rational" Prosperity in Africa

FX168 Financial News (North America) News According to Reuters, four months ago, Nigerian Abolaji Odunjo made a fundamental change to his mobile phone store on the bustling streets of Lagos: using bitcoin to pay suppliers.

Odunjo sources mobile phones and accessories from China and the UAE. For speed and convenience, Chinese suppliers require payment in cryptocurrencies. And the switch has boosted his profits because he no longer has to buy dollars with Nigeria's fiat currency, the Naira, or pay money transfer companies fees. Bitcoin seems to have found its original form in Africa - transaction currency.

“Bitcoin protects my business from currency debasement and allows me to grow,” Odunjo told reporters in his 16-square-meter shop. “You don’t pay, you don’t buy dollars.”

According to data shared exclusively by Reuters and interviews with about 20 bitcoin users and five cryptocurrency exchanges, Odunjo is one of the central figures in Africa's bitcoin boom, driven largely by small business businesses and Promotion of remittances sent home by migrant workers.

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According to data from Chainalysis, an American blockchain research company, the amount of cryptocurrency transfers in and out of Africa is less than US$10,000 per month, mainly by individuals and small businesses. In June this year, the transfer amount reached US$316 million, an increase of more than 55%.

(Source: Chainalysis)

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The number of monthly transfers has also risen by almost half to more than 600,700, Chainalysis said. The company said the study is the most comprehensive to date in mapping global password use. Much of this activity took place in Nigeria, South Africa and Kenya, the continent's largest economies.

This is a reversal for bitcoin, which was born as a payment tool more than a decade ago, although it is now mainly used for speculation by financial traders rather than commerce.

Reuters interviewed bitcoin users in five countries, including Nigeria and Botswana, who said bitcoin was helping their businesses become more flexible and profitable and enabling those working in places such as Europe and North America to send More income home, less closing costs.

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However, risks are everywhere.

Bitcoin and other cryptocurrencies are unregulated in many countries, and their legal status is unclear, meaning there is no safety net and little recourse if you lose your funds. In 2018, Nigeria’s central bank warned that cryptocurrencies are not legal tender and investors are not protected.

For many people, converting between local currencies and bitcoin relies on informal brokers. Prices are unstable, and buying and selling is a complex process that requires technical and knowledge support.

Odunjo's store is in an indoor section of the market known as the "Computer Village," one of a dozen units along a dark corridor with a steady stream of customers coming and going.

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He makes two or three bitcoin transfers with suppliers in Shanghai and Zhangzhou every month, each at about 0.5-0.7 bitcoin (about $5,900 to $8,300). Such deals are just one microcosm of a broader trend in Nigeria, and perhaps across the continent.

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In Nigeria, small cryptocurrency transfers totaled nearly $56 million in June, up nearly 50 percent from a year ago. Transaction volume rose more than 55% to 120,000 transactions. Chainalysis found that East Asia is one of the main partners for bitcoin transactions with Africa.

Measuring the usage of cryptocurrencies in a particular location is difficult, though. Digital coins offer a high degree of anonymity, and while the value of a transaction can be traced through the blockchain, the identity or whereabouts of the user cannot be traced. Chainalysis collects data by analyzing network traffic and transaction patterns. They track cryptographic flows for financial companies and U.S. law enforcement agencies, but the location of this data may be obscured by virtual private networks.

Nigeria's central bank has already devalued the naira twice this year as its oil-dependent economy has been hit by low oil prices and the pandemic. That means Odunjo and other importers have to pay more for increasingly scarce dollars.

Interviews revealed that the depreciation of the naira has prompted many Nigerians to turn to bitcoin as they seek ways to “purchase overseas goods without buying dollars.”

Sylvester Kalu, who runs a garment starch manufacturing plant in Uyo, eastern Nigeria, uses bitcoin to buy ingredients from Istanbul and Shenzhen. "It's all (because of) oil. When oil prices fall, the foreign exchange market panics. It becomes a very big problem."

Kalu says his transactions total about 2 bitcoins ($20,000) each: “I don’t need anyone in the bank, I don’t need a back door to get dollars.”

Timi Ajiboye, head of Bitcoin Exchange in Lagos, said the exchange's monthly cryptocurrency trading volume tripled to $21 million after the naira devalued in March.

And exchanges across Africa have seen a similar boom. Yellow Card, which operates in five countries, said its monthly crypto business quintupled in 2020 to $25 million in August. A big driver, the company added, was the use of bitcoin by workers to send money.

According to Luno, the monthly bitcoin trading volume of all market participants in South Africa and Nigeria halved to more than $536 million in August this year.

For some people working abroad, on other continents or in other African countries, it can be faster and cheaper to send money home via Bitcoin.

For example, a Nigerian worker in London who sends £100 ($132) to Lagos through a large traditional money transfer company pays about 5% in fees. And when sending larger amounts or using a debit card, the cost is lower, but the exchange rates offered are often several percentage points lower than market rates.

In contrast, bitcoin fees vary by exchange or broker, but generally speaking, bitcoin fees total around 2%-2.5% on £100.

However, exchanges and over-the-counter (OTC) brokers have risks, ranging from hacking to financial fraud.

In addition, except for transferring money, Bitcoin is not very useful in the market. Shops and landlords rarely accept it, which means that money sent by workers must be converted into traditional currency by friends or family, and going through a broker brings additional risks.

However, bitcoin users interviewed said many OTC brokers that rely on word-of-mouth reviews are operating reliably in an increasingly competitive market and are unwilling to damage the reputation they need to stay in business. For them, the "potential rewards" outweigh the "possible pitfalls."

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