Nigeria, known for its growing adoption of cryptocurrencies such as bitcoin, said on June 14 that
bitcoin, floats its national currency, the naira, allowing banks and other forex market participants to trade freely. The new policy could have several effects on cryptocurrency traders.
Forex traders can now exchange at rates set by the market, rather than those set by the Central Bank of Nigeria (CBN). The move follows the president's decision to introduce a 10% crypto tax on capital gains, which could be a game-changer For the Nigerian crypto industry, both positively and negatively.
Fluctuations in the value of the naira against other currencies, including cryptocurrencies, could affect the profitability of crypto trading. A rapid drop in the value of the naira can negatively affect cryptocurrency traders, which in turn can lead to a surge in profitability. According to Osawaru, amid the rapid depreciation of the naira, cryptocurrency traders may experience higher transaction costs due to potential changes in the exchange rate. Increased volatility can cause bid-ask spreads to widen, making it more expensive to buy and sell crypto currencies using the naira.
Cryptocurrencies are often traded on exchanges that rely on the liquidity of different fiat currencies, including the naira, to facilitate transactions. If the naira's liquidity declines, it becomes more challenging to match buyers and sellers at the desired price, lead ing to potential slippage and increased transaction costs.
Liquidity refers to the ease with which an asset can be bought or sold without significantly affecting its price. When a currency's liquidity decreases, it means fewer buyers and sellers are available in the market, which can lead to wider bid-ask spreads and increased price volatility. Osawaru said the free-floating naira could reduce arbitrage opportunities for cryptocurrencies by minimizing price differences between different markets. If the exchange rate of the naira is allowed to adjust freely, the chances of significant price ce differences between the naira and cryptocurrencies between different trading platforms or exchanges are reduced.
To mitigate any negative impact this new policy may have on the cryptocurrency market and economy, the Nigerian government could introduce cryptocurrency policies to create a more liquid and efficient trading environment, encourage market-making activities and ensure trans parency.
