Despite crash, crypto surge threatens financial system

• Nigerians stake $398.5m on two exchanges in one year
• Transactions increase by 50 per cent since CBN restriction
• Dip throwing more people into financial crisis
• Deposit mobilisation threatened as stable coins gain popularity

A serious crisis may be looming as an increasing number of Nigerian youths take to the wide-swing digital currency investment, notwithstanding a financial regulatory restriction the Central Bank of Nigeria (CBN) imposed in February.
 
The CBN had, in February, banned financial institutions from handling transactions relating to decentralised digital currencies otherwise known as cryptocurrencies, numbering over 4,000 in digital circulation.

Findings by The Guardian show that more youths, leveraging peer-to-peer opportunities, have adopted the relatively new investment window despite the ban. Not even the recent crash that saw Bitcoin, the flagship asset, losing over 50 per cent of its price, has discouraged investors.

Bitcoin has traded between $28,000 and $38,000 in the past weeks. In the height of the bull run, it rose to $68,800 before a sudden tumbling. But Bitcoin, which is considered as the gold in the crypto world, has been fortunate. Some coins (as they are fondly described by enthusiasts) have lost over 70 per cent of their prices.

A meme coin, Shiba Inu, for instance, hit $0.00005 after Binance listing saw it gaining over 2,000 per cent in a few days, had deflated to $0.0000087 as of press time. Komodo similarly tumbled from an all-time high of $4.7 recorded in April to less than a dollar. As at press time, it was trading at $0.6.

Nigerian new adopters, who threw in their savings in April, when the prices hit the roof, are currently biting their fingers. The situation is worse for those who gambled with borrowed funds even at a time, Elon Musk, Telsa founder and biggest supporter of digital currencies, warned that it was “not wise to invest life savings” in the fad.

The number and volume of resources from Nigeria moving into the exchanges have increased tremendously, analytics has suggested. The addicts, who disguise crypto-related transactions to evade sanctions by banks, have continued to increase their holdings while new entrants, including housewives, are being promised that the current crash is normal and momentary.
 
Data from Usefultulips.org, analytics that tracks trading on LocalBitcoins and Paxful, revealed that the volume of transactions from Nigeria has increased by roughly 50 per cent between February, when the CBN wields its stick, and June.

The two leading exchanges pooled a total of $32.5 million from Nigeria as against $21.9 million realised in February and $18.4 million invested in January. In January 2016, the total investment channeled through the platforms was $6,035 million.

Nigeria sits on the top sub-Saharan African market in terms of growth and volume of investment. Its investment in LocalBitcoins and Paxful in the past year alone stands toweringly at $398.5 million. It is followed by Kenya with $144.5 million investments.

Only Nigeria and South Africa have recorded stable growth in adoption since 2016 while the trend in other early African adopters such as Rwanda, Malawi, Angola and Tanzania are anaemic.
   
Usefultulips.org’s estimate does capture only naira-denominated transactions while Nigerians outside the country who are said to be among the leading drivers of the investment are obviously excluded. The Guardian was informed that over 70 per cent of young Nigerians in Malaysia, Ghana, South Africa and Europe are addict investors.

In the past few days, a photo of a ‘wanted alive’ Nigerian, said to have vanished with crypto transaction-related N28 million from Malaysia, has been trending on WhatsApp.

The figures captured by the digital platform also exclude activities on Binance, the leading exchange in terms of volume, and others Nigerians also patronise as they seek quick fortune.

Binance was in March last year compelled by the interest from Nigeria to launch P2P trading services for the naira, providing an open platform for users to trade cryptocurrencies using the currency with zero transaction fees on both Binance.com and Binance mobile app. Naira became the first African fiat currency supported on Binance P2P platform.

“We believe that Africa is a blockchain continent. We no longer need to bank the unbanked. We can empower them with cryptocurrency financial services directly. Nigeria is a vibrant innovation hub with a great passion for cryptocurrencies,” CEO of Binance, Changpeng Zhao, said.

At CoinDesk TV’s ‘First Mover’ show in June, CEO Paxful, Ray Youssef, said: “Everyone should have all eyes on Africa right now”, adding that the number of transactions on Paxful in Africa, combined with Google searches primarily from Nigeria, reflect the “tremendous momentum” around cryptocurrency adoption. He concluded that Africa is leading global cryptocurrency adoption.

While the next testimony session tarries for the new adopters, thousands of Nigerians are currently paying the price of the greed and emotion that rule crypto investment. The Guardian was taken into confidence by a trader who had invested N1.5 million meant for a family project without the knowledge of her husband.

“I bought a few coins a neighbour told me had a huge potential. I bought it in April when the prices were very high, yet he assured me that they would appreciate it sooner than I expected and that I would double the money before July (this month) when I would need it. I will be extremely fortunate if I realise 30 per cent of the investment if I liquidate it today. I don’t know what to do,” she narrated.
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Indeed, many new investors do not know what to do with the deflated investment. But the experts admonish – “hold don’t sell and if you have spare money buy the dips”. Buying the dip is synonymous with do not panic but expand your portfolio while others dump their assets for fear of more losses. But no single expert knows when the current crash will bottom out, hence those who buy the dips a month ago have suddenly realised they bought at a premium.

JP Morgan and other investment banks, who have attempted to project the market’s next move, do so with utmost probability. A few days ago, JP Morgan projected that the market has exited the bearish mood when Bitcoin regains its plus 50 per cent share of the total market.

Investment experts have labelled the ongoing coin value meltdown as the “great unwind”. Recently, Bitcoin assets experienced a statistical pattern technically described as a death cross as opposed to a golden cross. Death cross, in the investment market, refers to a rare downtrend when an asset’s 50-day moving average (MA) crosses its 200-day MA. Notable death cross events in other markets include the Wall Street Crash of 1929 and the 2008 Financial Crisis.

But experts have differed widely, holding binary positions on the significance of the death cross at this time. Some see it as a blip, a kind of price correction that will mark the beginning of a new rally towards a new high while others think it is the beginning of a long bearish trend.
  
It is not the first time the assets would suffer immense losses that jitters through the market. Amid the COVID-19 fear last year, Bitcoin lost 61 per cent. In 2018, it lost 84 per cent and 30 per cent in November 2017, while 40 per cent had been wiped two months earlier. As far back as January 2012 when the asset was a few dollars, it lost 43 per cent.

Between then and 2017, it lost at least 80 per cent several times to massive dumping that was only followed by a new high. The strength to rise again after its fall has been a source of consolation to those who have lost hard-earned resources to the pumping and dumping Musk’s entrance brought to the market.

For the ‘gurus’ in Nigeria, USDT, a stable currency at par with the dollar, has become an ally. They buy crypto assets when they think the market is down and convert to stable coin when they sense it will dive again, which has become a regular occurrence, an investor, Chima Okereke, said.

Investigation has also suggested that many youths, who have lost faith in the future of the naira, are swelling their USDT portfolio as an alternative savings window to naira. This culture which is growing very fast with the middle class also signing up on the crypto exchanges for the purpose (saving) may threaten the country’s ability to mobilise savings for investment in the medium- to long term. Stable currencies do not fall or appreciate on the exchanges.

Prof. Ken Ife, a consultant to ECOWAS and other multinational organisations, said Nigerian youths are exploring alternative investments owing to the challenge in the economy.

He admitted the banks would suffer from the fleeing resources but observed that the entire economy would benefit as the investors make more money and liquidate their assets for spending.

“I am not worried about the trend because they will not continue if they are not making money. At some point, the returns on their investment would be repatriated to the country for spending,” Ife noted. 

Bitcoin is still banned in Nigeria. However, the CBN has since said that it intends to launch a digital currency soon.

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