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)
