- Naira floating could have a negative or positive impact on cryptocurrencies.
- The Nigerian government floated the Naira shortly after introducing a 10% tax on crypto gains.
The Nigerian government has recently made a massive move regarding its crypto market, which can reduce the likelihood of artificial price differences between the Naira and cryptocurrencies in different needs.
On Wednesday, June 14, Nigeria, currently at a growing pace of its crypto adoption of Bitcoin, moved to float its national currency, Naira, enabling banks and other forex market players to trade it freely, and this new policy could impact crypto traders in some ways.
The floating of the Naira will mean foreign currency traders can now make exchanges at the rate set by the market instead of those developed by the Central Bank of Nigeria (CBN). This move was made following a decision by the country’s president to implement a 10% crypto tax on all capital gains. It could eventually be a game changer for the Nigerian crypto market, both positively and negatively.
In a conversation with a local crypto expert, David Osawaru, in Nigeria, Cointelegraph reported that David said the fluctuations in the value of the Naira against other currencies, with the inclusion of cryptocurrencies, could impact profitability for crypto trades. Likewise, a rapid drop in the Naira would also harm crypto traders, with a possibility of an inverse causing a spike in profitability.
According to David Osawaru, in the situation of a rapid naira devaluation, there’s a chance of crypto traders experiencing a higher transaction cost due to the potential changes they’ll incur in exchange rates. Increased volatility could result in a wider bid-ask spread, making it more expensive to buy or sell cryptocurrencies using the Naira.
Cryptocurrencies are usually traded on exchanges, and these exchanges depend on the liquidity of different fiat currencies, the Naira included, to facilitate trading. If the Naira’s liquidity decreases, it becomes easier to match buyers and sellers at desired prices, which could cause a potential slippage and an increase in trading costs.
Liquidity can be defined as the ease with which an asset can be bought or sold without a significant impact on its price. When there’s a decrease in liquidity, it means a reduction in available buyers and sellers on the market, which can result in a wider bid-ask spread and increased price volatility.
David added that free-floating the Naira could also reduce arbitrage opportunities for cryptocurrencies by minimizing market price discrepancies. If the Naira’s exchange rate can adjust freely, there’s less significant price disparity between the Naira and crypto across different platforms and exchanges.
Conclusion
To reduce any possibilities of an adverse effect of the new policy on the crypto market and the economy, the Nigerian government could introduce cryptocurrency policies to encourage a more liquid and efficient trading space and push for market-making activities and market transparency.
