Saturday, January 28, 2023

Despite the challenges in the global crypto markets this year, including extreme slumps in value, retail traders in Africa’s crypto market have continued trading digital assets.

  • In September 2021, cryptocurrency adoption in Africa reached a crucial milestone when Sub-Saharan African users surpassed $80 million in crypto holdings.
  • Before crypto, African countries embraced mobile money.
  • Even dramatic fluctuations in value, seen from this year’s crypto bear market, remain somewhat insignificant since African users normally cash in and out quickly.

Cryptocurrency adoption in Africa

In September 2021, cryptocurrency adoption in Africa reached a crucial milestone when Sub-Saharan African users surpassed $80 million in crypto holdings, surpassing the total number of U.S. users.

Morocco, a North African nation with a GDP below the global top 50 in the world, has one of the largest crypto-holding populations, with more than 2.5 per cent of the population possessing a form of digital currency.

Retail users rather than institutional investors primarily power Africa’s crypto growth. According to Chainalysis, Africa’s crypto market has a bigger share of its transaction volume from large retail and small retail-sized payments than the global average. This largely emanates from higher grassroots adoption amongst everyday users.

READ MORE: African Crypto Market and Its Growth Potential

Mobile money’s massive role in Africa’s crypto market

Before crypto, African countries embraced mobile money. In 2007, the first mobile money company, M-Pesa, completely changed how Africans spend and store money. The launch of mobile money in Kenya was a runaway success, with M-Pesa dominating over 99% of the market share.

This success led to widespread mobile money growth in Africa. Consequently, more than 60% of all global mobile money transactions flow through Africa. The significant success of mobile money in Sub-Saharan Africa has proven that it is open to embracing new technological advancements.

Africa has historically lagged in periods of global transformation due to the lasting effects of colonization and stereotypical thinking in the rest of the world. In the previous industrial revolutions, African countries were often exploited for natural resources or labour, aiding growth in the West at the expense of their development.

The world is undergoing a fourth industrial revolution, led by the widespread adoption of the internet and the movement to renewable energy sources. Blockchain, cryptocurrencies and other distributed ledger technologies (DLT) will play a role in this revolution.

Africa will not only participate in such a transformational period but also help lead it. The latest evolutionary step in crypto, Web 3, needs Africa to succeed with its willingness to adopt new technologies and huge populations needing better financial services.

What is a crypto bear market

In stocks, a bear market is a prolonged fall in investment prices. Usually, a bear market happens when a broad market index drops by 20 per cent or more from the most recent high. A bear market can affect the entire market or just individual stocks.

A crypto bear market is a period of prolonged and often volatile decline in the price of nearly all assets. By extension, a crypto bear market, commonly known as a crypto winter, is a similar slump in the value of crypto assets across the market. It often results in some projects being wiped from the market as they struggle to raise funds and meet user and investor expectations.

A crypto bear market begins with a demand-supply imbalance that sees most market participants on the sell side. Fear and uncertainty creep into frothy market conditions, and selling starts to outweigh the demand side, resulting in significant declines that fail to recover quickly.

From a technical perspective, this is reflected by a run of lower highs and lower lows on a more extended range, such as the highs and lows formed since November 2021 in the bitcoin market.

Crypto bear market 2022

Crypto bear market 2022

Even dramatic fluctuations in value, seen from this year’s crypto bear market, remain somewhat insignificant since African users normally cash in and out quickly. [Photo/24K-Production]

Since hitting an all-time high in market capitalization, the crypto market has seen an extended drop in 2022, with most assets currently trading more than 60 per cent from their historic highs.

Bitcoin has fallen by almost 60%. Ethereum is down by over 65%. For many investors and market participants, the complete collapse of the Terra stablecoin in May rocked trust in the emerging space.

Lennix Lai from OKX Institutional observes that the 2022 crypto bear market differs from the previous two. The current bear market does not only stem from crypto-specific risks like central lending insolvencies and the Luna. It also stems from crypto’s increasingly high connection to conventional financial markets and shocks like energy prices, the Russia-Ukraine war and surging global inflation.

The connection has remained relatively consistent since the beginning of the year. The collapse of Terra/Luna caused a sharp departure in March, and a series of liquidity issues from centralized crypto lenders triggered the second departure in mid-June.

READ MORE: Understanding BTC dominance and price to leverage against the crypto market

Retail traders in Africa’s crypto market remain unbowed

Despite the challenges in the global crypto markets this year, including extreme slumps in value, retail traders in Africa’s crypto market have continued trading digital assets. A Chainalysis report has shown that small retail transfers of $1000 or less have increased in Sub-Saharan Africa since the onset of the crypto bear market.

It remains challenging to establish precise trading volumes in Africa. Much trading occurs between individuals on informal peer-to-peer (P2P) networks as opposed to established crypto exchanges. This trend is likely pan-African.

Small retail transfers in Africa remain unfettered mainly by the bear market since users trade crypto for practical motives. This is because most African crypto traders lack the purchasing power for speculative trading, which is more prevalent in American or European markets.

Crypto as an alternative to traditional finance

Digital assets continue to grow popular among Africas because digital assets provide solutions to specific challenges that conventional financial systems cannot or have failed to solve. Crypto carries a unique attribute in Africa as a solution to the challenges of economic inefficiencies and financial exclusion. Consequently, a use-case is typically linked to crypto transactions in Africa, although hard to quantify.

Rapid rates of inflation in several African economies, and a substantial consolidation of the U.S. dollar on international markets, have made the greenback access more difficult and expensive for African consumers using local fiat currencies.

This poses a significant challenge for individuals or businesses who must pay for goods and services in the dollar or those needing a more reliable store of value than their depreciating currencies.

Crypto seemingly offers a solution. A growing number of African consumers continue investing in stablecoins, digital currencies designed to maintain a peg to the dollar.

Resilience amid global volatility

Cryptocurrencies in Africa continued to perform their functions amid market downturn and volatility. The decreases in value during the crypto bear market 2022 undoubtedly affected some African investors in the same way as investors globally. However, retail investors remained immune to downturns compared to speculative traders since they likely use crypto for specific purposes.

In African markets, crypto is a less tradeable asset and more of a hedge against capital restrictions and the volatility of local currencies. Even dramatic fluctuations in value, seen from this year’s crypto bear market, remain somewhat insignificant since African users normally cash in and out quickly. As long as Africa’s crypto market allows users to transfer money in a timely and cost-effective manner, the specific price at which it trades is not a significant concern.

Provided cryptocurrency fills the gap left by the letdowns of legacy finance, crypto adoption in Africa will continue on an upward trajectory amid challenges like the crypto bear market in 2022.

READ MORE: Blockchain critical value in Africa’s free trade area implementation

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