Africa’s crypto transactions are increasing despite the bear market
2022 has been a very difficult year for the digital asset and cryptocurrency markets. After rising to all-time highs last year, the value of many major cryptocurrencies has fallen sharply. Bitcoin has fallen by almost 60%. Ethereum is down over 65%. For many investors and market participants, confidence in the emerging space was shaken by the complete collapse of the Terra stablecoin in May.
This difficult bear market comes at a time when cryptos are increasingly prominent in markets across Africa. According to Chainalysis, a blockchain forensics firm, Africa’s cryptocurrency market grew by over 1,200% between 2020 and 2021. They added that four African countries – Kenya, Nigeria, South Africa and Tanzania – all rank in the top 20 for global crypto adoption.
This growth was largely driven by retail users rather than institutional investors. Chainalysis reported that African markets are seeing “a greater share of [their] transaction volume consisting of large retail payments and small retail transaction sizes than the global average.” This indicates “higher grassroots adoption among everyday users.”
Retail users continue to trade crypto
Despite the challenges crypto markets have faced this year, and despite the sharp depreciation, retail users across Africa seem to be continuing to trade digital assets. Another report by Chainalysis, published in September, showed that the number of small retail transfers of $1,000 or less has actually increased in sub-Saharan Africa since the beginning of the bear market.
While it is difficult to ascertain exact trading volumes across the continent – not least because much trading takes place between individuals on informal peer-to-peer (P2P) networks rather than established crypto exchanges – this trend is likely to be pan-African.
The volume of small retail transfers in Africa has been largely unaffected by the bear market because users tend to trade crypto for practical reasons. According to Adedeji Owonibi, founder of Convexity, a blockchain consultancy in Abuja, this is because the vast majority of citizens “do not have the purchasing power” to trade speculatively, as is more common in European or American markets.
He points out that the minimum wage in Nigeria, where he is based, is N30,000 ($69) a month and the unemployment rate is 33%. The amount of disposable income available for trading crypto for speculative reasons is therefore very limited.
Instead, crypto is mainly used as a way to solve the problems associated with limited access to formal banking systems and poor financial inclusion. Digital assets are used in particular for cross-border money transfers – especially in countries where capital controls make this more difficult – and to transfer money faster and cheaper than traditional means allow.
Incentives for crypto use in Africa
In particular, the remittance corridor between Africa and Western markets is one of the most expensive in the world, encouraging more consumers in Africa to use digital assets to send or receive money from friends or family abroad. Using crypto is much cheaper than traditional channels, such as Western Union, and ensures near-instant settlement, advocates claim.
William Phelps, a chief investment officer at Adaverse, a Lagos-based venture capital firm, says African business that in African markets, crypto functions “less as tradable assets” and more “as a hedge against local currency volatility and capital restrictions.”
Even dramatic fluctuations in value, of the kind seen this year, are therefore not particularly significant because users tend to cash in and out quickly. As long as crypto continues to allow users to get money from one place to another in a cost-effective and timely manner, the specific price at which it trades is not a major concern.
Phelps says that because of this, “when you’re using cryptocurrency to move money across borders, for example, market trends are less important.”
Many consumers in Africa also continue to use crypto as a way to access US dollars. Various African countries have seen a drop in their central banks’ foreign exchange reserves, which can make it very difficult to access currencies such as the dollar.
The Central Bank of Nigeria, for example, recently restricted trading in authorized foreign exchange markets because reserves had fallen by 3.4%. Kenya’s foreign reserves have also fallen at an unprecedented rate.
Rapid inflation rates in a number of African economies, and a significant strengthening of the US dollar in global markets, have made access to the dollar more expensive and difficult for African consumers operating in their local fiat currencies. This is a big problem for businesses or individuals who have to pay for goods and services in dollars, or for those who want to use a more reliable store of value than their own falling currency.
Crypto is considered to offer a solution to this. A growing number of consumers in Africa are investing in stablecoins, digital currencies designed to maintain a peg to the dollar.
While the collapse of the Terra stablecoin provided a dire warning that these pegs cannot always survive difficult market conditions, stablecoins such as Tether (USDT) or USD Coin (USDC) are perceived by some as offering indirect access to the dollar. Phelps notes that “stablecoins like USDT and USDC present large market-neutral stores of value, especially in nations where foreign currency is harder to obtain and international merchants are reluctant to accept local money.”
Inflation makes crypto attractive alternative
There is also a less practical reason that may explain crypto’s continued popularity. Widespread and unpredictable inflation in a number of African economies also ensures that crypto remains an attractive option. Inflation rates in Nigeria, Ghana and Sierra Leone are all approaching 20%, while in Zimbabwe it is almost 90%. Owonibi believes that such high inflation levels make consumers more likely to take a risk on crypto.
Crypto fills the gap left by older finance
Crypto usage has remained strong in Africa, especially among retail users, because digital assets are there to provide solutions to specific problems that formal financial structure cannot, or has not, solved. Phelps said crypto has a “unique nature” in Africa as a tool that solves “the problems of financial exclusion and economic mismanagement.” This means that “although difficult to quantify, there is usually a use case associated with crypto transactions on the continent.”
Digital assets have a number of specific functions in Africa, and are still able to perform these functions during periods of market volatility and downturns. While some African investors will undoubtedly have been affected by the drop in value, as have investors worldwide, retail users are more immune to downturns than speculative traders because they are more likely to use crypto for specific reasons.
As long as crypto is able to fill the gap left by the failures of legacy finance, consumers in markets across Africa can continue to turn towards it.
