In my research and investing I stress three things: people, structure, and value. I look for companies that are controlled and managed by quality people, have corporate structures that align minority and majority shareholder interests and trade at valuations that are below fair value if not outright cheap.
This note is actually not about any of that and instead just a quick one about bitcoin and how my initial skepticism may have been wrong. I usually don’t write “macro” or ‘thought pieces’ but I heard some interesting news about bitcoin and how it’s gaining traction in Nigeria. I use “bitcoin” in the generic sense in this article, much like Nigerians use ‘coke’ to refer to all soft-drinks, as in ‘what kind of coke do you have?’.
I never took bitcoin seriously but I
’m now rethinking it. My rethinking is due to a by-the-way comment on a recent trip to Lagos. It came from Ugodre Obi-Chukwu, a partner at Nairametrics, a Nigerian data provider and consultancy. He mentioned that Nigerians are increasingly buying bitcoins. Not for speculation or transactions, but as a way to store wealth (Nairametrics’ website can be found here
This was news to me. I never considered something paying no interest, and with no government support, control or oversight to be safe. However, if the possibility exists that government policies and actions may destroy wealth, then perhaps it’s safer to store hard-earned money outside the system. Many people in mismanaged developing economies may be feeling this way. People are mostly rational. Physical gold in the old days and now; bitcoin now and in the future?
Apparently, Nigerians, and Venezuelans, are turning to bitcoin for this and other reasons (for related article see here
A similar characteristic of both countries is the big difference between the official and ‘parallel’ rate exchange rate. In Nigeria, the parallel rate vis-a-vis the USD is some 30% higher than the official rate. In Venezuela it’s even worse. The official rate is USD1 = VEF10, but Google-sourced news sites put it closer to VEF1,500 to 1,700 (or even VEF3,000+!).
I did some quick research on bitcoin and cryptocurrencies and found that they have a lot of positive qualities that make them particularly attractive to savers and others in the developing world.
Store of Value: Volatility. A key argument for not storing wealth in bitcoin form is that bitcoin prices are volatile. But so are many currencies in developing countries. Most of bitcoin’s volatility has been positive, with its price rising more than falling. This is the opposite of many countries’ currencies vis-à-vis the defacto USD standard. Egyptians who held bitcoin likely did very well versus their countrymen who stuck with the Egyptian pound (which is down by 51% in the last five months).
Store of Value: Gold. Gold is one of the few stores of value that is mostly outside government control. It’s not entirely so however. In 1934 under the Gold Reserve Act, Americans were forced to sell it to the US Government. However gold is not a ‘fiat’ currency that can be printed at the will of government. Like gold, bitcoin does not pay a return. However it’s much easier to buy, sell and store than physical gold.
Less Fees. Banks are charging a lot of money for their services. Despite incredibly large net interest margins (10+%), Nigerian banks charge a central bank mandated 0.1% fee on current accounts called “Commission of Turnover” and a Naira50 fee for all non-current account transactions. These are good for bankers, but not for savers. Bitcoin does not charge these fees.
Easier, Faster and Cheaper. Changing money in Nigeria requires going to the bank and filling out forms, supposedly a lot of them. It takes 3-5 days to transfer the funds through the bank versus seconds or minutes using bitcoin. It also involves paying stamp duties, and telex charges. And it’s expensive.
Transferring money can cost up to USD100 in Nigeria. Bitcoin charges 0-2% of the transaction from what I’ve read. (Even in Asia it’s not cheap to transfer funds. Transferring money via large banks located in Hong Kong and Singapore costs about USD35. If done monthly this adds up to USD420 per annum. If weekly, close to US$2k. I thought large, too-big-to-fail banks were supposed to have lower fees, not gouge their customers. It’s like a regressive moral hazard tax).
Freer. Nigerians are capped at transferring a maximum of US$10,000 per day. Bitcoin does not have this restriction. (Even my big, supposedly very well-capitalized bank in Hong Kong has transfer caps and restrictions).
Transferable. Bitcoins are increasingly being accepted as payment for other items. According to a very well-written article on bitcoin published on Nairametrics, bitcoins can be used as a means of payment for many hotel and travel expenses, one of the key uses for USD presently by Nigerians.
More trustworthy? Bankers don’t have a good reputation. Nigeria had a banking crisis in 2008. Lehman went bust and HSBC is under heavy scrutiny from US regulators. Look at the long-term share prices of Greek banks. Cypriot banks took a large haircut from their savers. Is bitcoin a reasonable option?
Once burned twice shy.
Developing countries have a good habit of starting with the latest technology rather than upgrading. Leapfrogging is the term most people use. With such a young demographic, I wonder if today’s Nigerian teenagers will ever know what foreign exchange forms look like, just like they may never use a ‘land-line’.
Better, faster, cheaper is a a powerful hat trick. It has worked well with new in the past and there’s no reason to think it won’t in the future. Wither the banks?
(Many ideas for this article were taken from Manasseh Egedegbe’s post on Nairametrics where he explains both the rationale and practicalities of using bitcoin in Nigeria. His article is here)