Nigeria, known for its growing adoption of cryptocurrencies, particularly Bitcoin (BTC), on June 14, floated the nation’s naira currency to allow banks and other forex market actors to trade the currency freely. This new policy can have several implications for crypto traders.
Foreign currency buyers and sellers can trade at rates they feel comfortable with based on market conditions, instead of what the Central Bank of Nigeria (CBN) forces them to sell. This move follows the President’s decision to implement a 10% crypto tax on capital gains and could easily be the biggest game-changer for Nigeria’s crypto industry, positively or negatively.
Cointelegraph spoke with a local crypto expert, David Osawaru, who said that fluctuations in the value of the naira against other currencies, including cryptocurrencies, may impact the profitability of crypto trades. A rapid drop in the value of the naira would have a negative impact on crypto traders. On the other hand, it would mean high profitability if the value of the naira spikes.
— Central Bank of Nigeria (@cenbank) June 14, 2023
According to Osawaru, in the case of rapid naira devaluation, there’s the possibility of crypto traders experiencing higher transaction costs due to potential changes in exchange rates. Increased volatility could result in wider bid-ask spreads, making it more expensive to buy or sell cryptocurrencies using the naira.
Cryptocurrencies are typically traded on exchanges and these exchanges rely on the liquidity of different fiat currencies, including the naira, to facilitate smooth trading. If the liquidity of the naira decreases, it becomes more challenging to match buyers and sellers at desired prices, leading to potential slippage and increased trading costs.
Liquidity refers to the ease with which an asset can be bought or sold without significantly impacting its price. When the liquidity of a currency decreases, it means that there is a reduction in the availability of buyers and sellers in the market, which can result in wider bid-ask spreads and increased price volatility.
Osawaru said that the free float of the naira could also reduce arbitrage opportunities for cryptocurrencies by minimizing the discrepancies in their prices across different markets. If the naira’s exchange rate is allowed to freely adjust, it becomes less likely for significant price disparities to exist between the naira and cryptocurrencies across different trading platforms or exchanges.
To mitigate any possible negative effects of this new policy on the crypto market and the economy at large, the Nigerian government could introduce cryptocurrency policies to foster a more liquid and efficient trading environment, encourage market-making activities and ensure transparency.