Nigeria, a nation witnessing a growing influx of cryptocurrencies such as Bitcoin, now permits banks and other forex market participants to freely trade the Naira.
This shift, embedded with a myriad of implications for crypto traders, could both enhance and challenge the burgeoning crypto industry.
The impact of Naira’s floating on crypto trades
The new monetary policy positions foreign currency traders to exchange at market-determined rates rather than those fixed by the Central Bank of Nigeria (CBN).
This critical shift, paired with the president’s choice to impose a 10% crypto tax on capital gains, could play an instrumental role in transforming Nigeria’s crypto sphere. The move, however, doesn’t come without its potential drawbacks and benefits.
Crypto connoisseur, David Osawaru, suggests the profitability of crypto trades could be subject to the oscillations of the Naira value relative to other currencies, including cryptocurrencies.
A swift plunge in the currency’s value could be detrimental to crypto traders, while its converse – a surge – might provoke a leap in profitability.
Osawaru also hints at the possibility of crypto traders facing elevated transaction expenses due to potential modifications in exchange rates should the Naira devalue rapidly.
The escalation in volatility could lead to a broadening of bid-ask spreads, raising the costs of purchasing or selling cryptocurrencies with the Naira.
Cryptocurrency exchanges and the Naira’s liquidity
Cryptocurrencies are commonly traded on exchanges that depend on the liquidity of various fiat currencies, including the Naira, to ensure seamless trading. A drop in the Naira’s liquidity could pose challenges in pairing buyers and sellers at desired prices, leading to potential slippage and an upswing in trading costs.
When the liquidity of a currency shrinks, it reflects a decline in the availability of buyers and sellers in the market, potentially causing wider bid-ask spreads and a spike in price volatility.
Osawaru also mentions that by making the Naira a free-floating currency, arbitrage opportunities for cryptocurrencies could be reduced by shrinking price discrepancies across different markets.
If the Naira’s exchange rate can adapt freely, it becomes less probable for significant price disparities to exist between the Naira and cryptocurrencies across various trading platforms or exchanges.
To cushion any potential adverse impacts of this new policy on the crypto market and the economy, the Nigerian government could explore cryptocurrency policies that nurture a more fluid and effective trading environment.
The government could promote market-making activities and advocate for transparency, fostering a climate that further accommodates the growth of the crypto market in tandem with the currency’s new-found flexibility.
In conclusion, the decision to float the Naira may prove to be a double-edged sword for Nigeria’s crypto market. As the value finds its place in the free market, the potential ramifications – both positive and negative – could shape the future of crypto trading in the country.
The government’s response to these developments, particularly their crypto policies, will be instrumental in defining this future.