Reading 3 min Views 5 Published Updated
Nigeria, known for its growing adoption of cryptocurrencies, particularly Bitcoin (BTC), launched the national currency naira on June 14 to allow banks and other forex market participants to freely trade this currency. This new policy could have several implications for cryptocurrency traders.
Buyers and sellers of foreign exchange can trade at the rate they are comfortable with depending on market conditions, rather than the rate that the Central Bank of Nigeria (CBN) forces them to sell. The move follows the president’s decision to introduce a 10% tax on cryptocurrencies on capital gains and could easily be a game-changer for Nigeria’s crypto industry, both for good and bad.
Cointelegraph spoke with local cryptocurrency expert David Osawaru, who said fluctuations in the value of the naira against other currencies, including cryptocurrencies, could affect the profitability of cryptocurrency trades. The rapid fall in the value of naira will have a negative impact on cryptocurrency traders. On the other hand, it will mean high profitability if the price of naira rises sharply.
Press Release: Operational Changes to the Foreign Exchange Market …https://t.co/80AqEHqJub pic.twitter.com/ClbVJducnN
— Central Bank of Nigeria (@cenbank) June 14, 2023
In the event of a rapid devaluation of naira, cryptocurrency traders could face higher transaction costs due to possible changes in exchange rates, Osawaru said. Increased volatility could lead to a wider bid-ask spread, making it more expensive to buy or sell crypto using naira.
Cryptocurrencies are usually traded on exchanges, and these exchanges rely on the liquidity of various fiat currencies, including naira, to ensure smooth trading. If naira’s liquidity declines, it becomes more difficult to find 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 affecting its price. When the liquidity of a currency decreases, it means that the number of buyers and sellers in the market decreases, which can lead to widening bid-ask spreads and increased price volatility.
Osawaru said the free float of naira could also reduce arbitrage opportunities for cryptocurrencies by minimizing discrepancies in their prices across markets. If the naira exchange rate is allowed to adjust freely, it becomes less likely that there will be significant price differences between naira and cryptocurrencies on different trading platforms or exchanges.
Related: Nigerian Regulator Suspends Binance Operations: Report
To mitigate any possible negative effects of this new policy on the crypto market and the economy as a whole, the Nigerian government could introduce a policy on cryptocurrencies to create a more liquid and efficient trading environment, encourage market creation activities and ensure transparency.