If you search for the price of bitcoin, you’ll probably notice that it varies depending on which platform you’re on. It will also change depending on the country you’re in – even after adjusting the local currency rate. For example, the price on your Luno app in Malaysia will be different to the price on your Luno app in the UK even if we’re comparing it pounds for pounds.
These variations in price will usually only be small, but in certain circumstances they may be far greater. In Nigeria, for example, bitcoin is currently trading at a premium of almost 20%. While the bitcoin price recently surged up to $60K across most of the world, in Nigeria it super-surged to $86K.
This is certainly unusual, but such strange behaviour is actually quite easy to understand when you know how the market works and what drives the price.
Luno doesn’t set the price of bitcoin or any cryptocurrency – no cryptocurrency exchange does. All an exchange does is provide a platform to facilitate people buying and selling cryptocurrencies between themselves.
The price you pay, therefore, all comes down to supply and demand. If there are more people on a platform willing to sell bitcoin than there are to buy, the price will go down. If demand is higher than supply, the price will go up.
The total supply of bitcoin is fixed at 21 million and it is released at a consistent and known rate until it reaches that number. This is one of its main selling points. The supply will vary between exchanges, but the impact of that is usually fairly minimal on price. The big driver of price volatility will be swings in demand. These swings can be caused by a whole host of factors, from the introduction of new regulations to FOMO, and beyond.
Each exchange is essentially just its own unique marketplace where people who have bitcoin can sell to those who want it.
The price of bitcoin is therefore determined by what traders are willing to pay for it. The traders you find on each platform will be different, and will therefore set different prices. The price you see on Luno will subsequently not be the same as the one you see on another exchange, in the same way that if you go on eBay or Amazon and look for the latest iPhone, the prices will be slightly different.
In the same way that an iPhone will cost you roughly the same on Amazon and eBay though, market forces also mean that the price of bitcoin remains roughly similar between crypto exchanges. Traders can, after all, still see price movements on multiple platforms at once and move between them. There are correlations created by events such as arbitraging, for instance, whereby traders will buy bitcoin on one platform where it’s cheaper, then send it to another platform where it’s more expensive and sell it there. These usually keep the prices on exchanges broadly aligned.
The Central Bank of Nigeria’s (CBN) recent decision to ban financial institutions from working with cryptocurrency providers has changed this. In doing this, we can no longer work with our payment partners and therefore can't process deposits and withdrawals in Naira any more, effectively removing local currency on and off ramps. This has essentially broken the arbitrage loop and created market inefficiencies that have removed that correlation between the exchanges. They’re now operating completely independently of one another and you’ll find the price can differ significantly as a result.
In the same way that the price of bitcoin will differ between platforms, so too will it differ between different countries.
Traders in each country have different wants and needs unique to the wider macroeconomic climate they find themselves in. Subsequently, demand for cryptocurrency will vary. To take Nigeria as an example, demand for bitcoin in the country has long been among the highest in the world. This is largely because Nigeria is an inflationary country, and citizens have turned to bitcoin to weather value drops in Naira and protect their wealth by harnessing the power of a global economy.
This has always led to Nigerians paying a small premium for bitcoin, so in some ways this recent premium is nothing new. However, the CBN’s decision has created new market inefficiencies that have caused even greater abnormalities in price.
This is because buyers’ money is now stuck on crypto platforms. Because withdrawals are no longer possible, the Naira that they currently have sitting on cryptocurrency platforms can either sit there to depreciate or it can be used to buy bitcoin or another cryptocurrency. Buying bitcoin is basically the only option for people looking to store their money, and the only means they have for sending money somewhere else. As a result, they’re willing to pay a higher price for it so they can use their capital. Sellers have a lot more power than is normal, so there’s an imbalance and they’re charging more.
Due to the falling purchasing power of the Naira, on any given day, Nigeria has multiple exchange rates with the dollar. According to economist Koji Kubo, multiple exchange rates emerge within the unofficial market when governments implement “exhaustive exchange restrictions” or limitations on the amount of foreign currency that could be bought or sold.
This is true of Nigeria. In 2020, local media reported that Nigerian banks were limiting the amount of dollars Nigerians can spend abroad to as low as $500. At the same time, Nigeria’s also facing a US dollar shortage. Thanks to the scarcity of dollars that could not meet local demand, the value of the Naira fell in local informal markets as people showed willingness to pay more Naira per dollar.
This means NGN/USD exchange rates will also often vary wildly between platforms.
An abnormality that we have seen become more frequent since the CBN’s announcement is slippage.
When the CBN decided to prohibit local financial institutions from servicing crypto firms, it had a knock-on effect on liquidity.
Liquidity is an exchange’s ability to convert a crypto asset to cash or other cryptocurrencies without influencing the asset’s price too much. Luno’s order book (where bids and asks are recorded) is now significantly smaller than it was before and liquidity is lower. Marius Reitz, Luno’s General Manager for Africa, notes that while Luno still has liquidity, “it is a third of what it was previously”.
When an exchange has lower liquidity, it generally leads to higher slippage.
What’s slippage? A good question. As noted earlier, when you buy cryptocurrency on the Luno Exchange, you’re buying from another person or multiple people, and the amount of cryptocurrency available at a certain price is limited.
In a period of high volatility when prices are changing rapidly, in the time it takes your trade to fill, the bitcoin that you were trying to buy is more likely to get sold. This means your order will be filled with bitcoin that’s being sold at another price. The intended execution price and actual execution price will therefore differ.
Let’s look at an example.
A BTC/USD bid/ask is quoted at $50,000/$51,000 respectively.
A buy market order for 1 BTC is placed, with the intention the order gets filled at $51,000.
However there is only 0.5 BTC at $51,000 and 0.5 BTC at $52,000.
The order will then fill at an average of $51,500 – greater than the $51,000 best ask price.
It’s not a coincidence that countries with the highest BTC valuations consistently score lower on investment and financial freedom global rankings. Strict government controls create additional risks and costs for local currency conversion and remittance.
It’s therefore likely that Nigerians will continue to pay a premium for bitcoin until they make changes to the system and the market will continue to exhibit unusual behaviours. We are still in communication with the CBN though, and are hopeful that they will soon grant us access to our accounts to be able to payout Naira.
As soon as we are able to get access to our accounts, you will be able to withdraw. This should go some way to addressing inefficiencies in the market and ensure that Nigerians can trade more smoothly, without being subject to more volatility and paying a premium for their Bitcoin. In the meanwhile, rest assured that your funds are completely safe and we are on your side.