The Cryptocurrency Frenzy: A Call for Caution

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Wednesday, July 07, 2021 / 12:39 PM / by CSL Research / Header Image Credit: Observer

 

A Guardian news report says an increasing number of Nigerian youths are investing in cryptocurrencies despite a financial regulatory restriction imposed on dealings in the digital currencies by the Central Bank of Nigeria (CBN) in February and the recent crash that saw Bitcoin, the flagship asset, losing over 50% in value. According to the report, data from Usefultulips.org, analytics that track trading on local Bitcoins and Paxful, revealed that the volume of transactions from Nigeria has increased by roughly 50% between February (when the CBN banned financial institutions from handling cryptocurrencies) and June. In 2020, according to a report published by TechPoint Africa, c.US$400m worth of cryptocurrencies were traded in Nigeria.

 

Despite the many benefits associated with the use of cryptocurrencies such as speed, anonymity and accessibility, the opacity of cryptocurrencies that have made them become well-suited for conducting many illegal activities such as money laundering, terrorism financing, purchase of small arms and light weapons, and tax evasion makes them unacceptable by many monetary authorities. Unlike Fiat Money which is accompanied by full faith and comfort of a country or Central Bank, cryptocurrencies do not have any intrinsic value and do not generate returns by themselves and are highly volatile. These reasons informed the decision of the CBN in February 2021, to stop financial institutions in Nigeria from allowing their platforms to be used for cryptocurrency transactions.

 

We note that the rising number of Nigerians patronizing cryptocurrencies reflects the dearth of high yielding investment options amidst a significant decline in the purchasing power of households. Recently, the World Bank highlighted that 7 million Nigerians were pushed into poverty by the continued rise in consumer prices (especially food), implying that investments in potentially high yielding ventures such as cryptocurrencies, despite associated risks will continue. For crypto exchanges, players have leveraged the use of Peer to Peer (P2P) for settling cryptocurrency trades and activities have continued unabated in the space.

 

The unusual volatility of these currencies however calls for caution. Recently, Elon Musk, CEO of Tesla Motors was reported to have advised that investments in cryptocurrencies should be made from the place of comfort, and funds like life savings should not be invested in cryptocurrencies due to its volatility. Bitcoin has traded between US$24,000 and US$38,000 in the past weeks. In the height of the bull run, it rose to c.US$63,000 before a sudden drop which resulted in about a 50% decline in value. Some other coins have lost more than 70% in value.

 

The Nigerian Securities and Exchange Commission (SEC) had in September 2020 released a publication highlighting how cryptocurrencies should be treated, thereby providing a framework for holding them as a digital asset in Nigeria. We believe that initial step should be followed by further investor education and more intense regulatory oversight.

 

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