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With many Africans using cryptocurrencies for everyday transactions rather than speculation, usage remains high across Africa even as values tumble.

2022 has been a very difficult year for digital asset and cryptocurrency markets. After surging to all-time highs last year, the value of many major cryptocurrencies have dropped sharply. Bitcoin has fallen by almost 60%. Ethereum is down by over 65%. For many investors and market participants, trust in the emerging space was rocked 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 1200% 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 powered by retail users rather than institutional investors. Chainalysis reported that African markets see “a bigger share of [their] transaction volume made up of large retail and small retail-sized payments than the global average.” This indicates “higher grassroots adoption amongst everyday users.”

Retail users continue to trade in crypto

Despite the challenges the crypto markets have faced this year, and despite the steep deterioration in value, it appears that retail users across Africa are nonetheless continuing to trade digital assets. Another report by Chainalysis, published in September, showed that the number of small retail transfers of $1000 or less have actually increased in Sub-Saharan Africa since the beginning of the bear market.

While it’s difficult to ascertain precise 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 be trading crypto for practical reasons. According to Adedeji Owonibi, founder of Convexity, a blockchain consultancy firm in Abuja, this is because the vast majority of citizens “don’t 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 to trade crypto for speculative reasons is therefore highly 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 especially for cross-border remittances – especially in countries where capital controls make this more difficult – and to transfer money quicker and cheaper than traditional means allow.

Incentives for crypto use in Africa

The remittance corridor between Africa and Western markets in particular is one of the most expensive in the world, which is incentivising increasing numbers of 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, proponents argue.

William Phelps, an investment manager at Adaverse, a Lagos-based venture capital firm, tells African Business that in African markets, crypto acts “less as tradeable 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 especially significant because users tend to cash in and cash out quickly. As long as crypto continues to allow users to get money from one place to another in a cost-effective and timely way, the specific price at which it’s being traded is not a major concern.

Phelps says that because of this, “when 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 of accessing US dollars. Various African countries have seen a fall in their central banks’ foreign reserves, which can make accessing currencies like the greenback very difficult.

The Central Bank of Nigeria, for example, recently limited trading on authorised foreign exchange markets because its reserves had declined by 3.4%. Kenya’s foreign reserves have also declined at an unprecedented rate.

Rapid rates of inflation in a number of African economies, and a significant strengthening of the US dollar on global markets, have made accessing the greenback more expensive and more difficult for African consumers operating in their local fiat currencies. This is a major problem for businesses or individuals who need to pay for goods and services in the dollar, or for those seeking to use a more reliable store of value than their own depreciating currencies.

Crypto is seen to offer a solution to this. An increasing number of consumers in Africa are investing in stablecoins, digital currencies which are designed to maintain a peg to the dollar.

While the collapse of the Terra stablecoin offered a serious warning that these pegs can’t 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 such as USDT and USDC present great market-neutral stores of value, particularly in nations where foreign currency is harder to acquire and international merchants are reluctant to accept local money.”

Inflation makes crypto attractive option

There’s also a less practical reason that could explain crypto’s continuing popularity. Rampant and unpredictable inflation in a number of African economies is also ensuring crypto remains an attractive option. The inflation rates in Nigeria, Ghana, and Sierra Leone are all approaching 20%, while in Zimbabwe it’s almost 90%. Owonibi believes that such high levels of inflation make consumers more likely to take a risk on crypto.

Crypto fills gaps left by legacy finance

Crypto use has remained strong in Africa, particularly among retail users, because digital assets are there to provide solutions to specific problems that formal financial structure cannot, or have not, solved. Phelps said that crypto has a “unique nature” in Africa as a tool that resolves “the problems of financial exclusion and economic mismanagement.” This means that “although hard to quantify, there’s typically a use-case associated with crypto transactions on the continent.”

Digital assets have a number of tangible functions in Africa, and are still able to perform those functions in periods of market volatility and downturn. While some African investors will undoubtedly have been affected by the decreases in value, as investors worldwide have, retail users are more immune to downturns than speculative traders because they are more likely to be using crypto for specific reasons.

For as long as crypto is able to fill the gap left by the failures of legacy finance, consumers in markets across Africa may continue to turn towards.


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