In the below survey from Statista, the countries with the highest Crypto usage are mostly in emerging/frontier markets. The top 5 consist of different very economies, including large commodity exporters such as Nigeria (Oil) and Peru (Copper). There are also Vietnam and Philippines, both are large tourism destinations (let’s ignore Turkey, as Cryptos are banned there). Then you have Switzerland….. a very rich country, with very high standards of living, stable economic growth and low annual inflation rates.
My question is, do Swiss people have very different motivations than Nigerians or Vietnamese people for buying Crypto’s? The Nigerian person lives in a country where annual inflation is very high (20%), the currency is weak (down 24% vs US $ in 2020), youth unemployment is 33%, and the political landscape is very fragile. The Vietnamese and Swiss person do not.
My view is that most people view Bitcoin as an investment similar to stocks, i.e. a risky asset which goes up in price overtime, which is the main reason people flock to it.
I’ve come across some smart people (some with, but most without any skin in the game), on Twitter and in person proclaiming Bitcoin as an inflation hedge, i.e. as inflation rises, the price of Bitcoin rises also. The other refrain i’ve heard many times is that Bitcoin acts as a hedge against the current fiat monetary system. While this may turnout to be true in the future, for now it is debatable.
So what does the data show?
Astonishingly, over the past 3 years, Bitcoin has been a perfect hedge against rising in inflation in Nigeria, or put differently both annual inflation bitcoin prices have been moving almost perfectly in tandem. There is a similar trend for all countries since 2020, which is simply due to COVID-19. As the pandemic hit, inflation fell globally and since then inflation rates have risen and so has Bitcoin.
Bitcoin has also been an attractive alternative source of income for many of the tech savvy youths in Nigeria.
In 2020, Nigeria ranked 3rd place (in terms of Bitcoin trading volume) right behind US and Russia, generating more than $400m worth of transactions. This coincided with a period of limited access to US $ in Nigeria. As the inflow of US $ through official channels like e.g. oil exports dried up, the authorities introduced capital controls to stop the Naira from falling. This also meant foreign investors could not get their money out of the country. One way of circumventing this restriction was to transfer Naira to Bitcoin, then Bitcoin to US $.
As for Switzerland, they have passed numerous laws, and focused on Crypto over the last few years, to support a growing industry. The Swiss canton “Zug” has been dubbed “Crypto Valley” over the many Crypto start up firms that have set up shop in the jurisdiction over its friendly blockchain and crypto regulation. This may explain why Switzerland is right behind #5 in the list.
Conclusion:
While i still believe that the primary motivation for buying Crypto’s is the potential of huge returns, I cannot deny the obvious benefits it has for people living in places like Nigeria. In a place where the majority of the population do not have bank accounts, Cryptos offer an instant and effective solution to this problem. Further Cryptos allows locals to gain access to US $ or other western currencies, something which is very difficult and expensive in Nigeria.
The downside to all of this is that the volatility of Cryptos make them not very useful for day to day activities like buying groceries or paying a bill. The price of Bitcoin fell from $60K to round $35K at some point this year. Not great if you want to plan ahead.
The largest risk of all is that the use of Crypto’s are banned. Something that would not surprise me after Nigerian authorities blocked the use of Twitter last week link.
Well done. Keep it up!