Today, the price of bitcoin is quoted at Sh. 1,668,754, Internationally, but its price in Kenya is quoted at Sh. 1,984,991. So why is the price of bitcoin in Kenya significantly higher? And can this be fixed?
TL-DR: Because no one is mining cryptocurrency in Kenya. Because locals have not started their own cryptocurrencies to solve local problems, all the bitcoin in circulation in Africa comes from people who bought it at an exchange elsewhere for a profit.
This article was first written by Tawanda Kembo for Golix Blog. It has been edited. Follow him on Twitter
1. Liquidity
What is seen in African countries where there are bitcoin exchanges is that, although the price of bitcoin all over Africa is higher than it is on international exchanges, it tends to be lower in markets where there is more liquidity and higher in markets where there is less liquidity. In South Africa where the volume of bitcoin that’s trade is high, it’s around 5% higher than it is on other international exchanges but in places like Nigeria and Angola, where the volume of bitcoin that’s traded there is low, the price of bitcoin there is gets as much as 100% higher.
2. Demand exceeds supply
Liquidity alone does not influence price but liquidity and supply/demand together are what influence price movements. If we have a bitcoin supply but don’t have a demand for it, that does not force the price to go up. The price only goes up when the demand exceeds the supply. When demand exceeds supply, the demand will start competing with itself to buy the limited amount of bitcoin that is available on the free market — one where the highest bidder is the one who walks away with the bitcoin.
READ: WHAT YOU NEED TO KNOW ABOUT BITCOIN BEFORE 2018
In such a market, only the people willing to buy bitcoin at higher prices are the ones who actually walk away with bitcoin. The price of bitcoin in Africa is only higher because we actually people willing to buy bitcoin at a premium. In the next section I talk about why.
3. The bitcoin in Kenya was bought on an exchange outside Kenya
When you think about it; the price of bitcoin that is quoted on an exchange is not the actual cost to acquire the bitcoin. If you were to include bank transfer costs when you make the usd deposit, the deposit fee the exchange charges and the transaction fees you’re charged when you actually buy bitcoin, the actual cost for buying bitcoin ends up being in the 3% — 6% range.
BITSOKO: KENYA’S BITCOIN WALLET
The costs are even higher if you’re buying with a different currency than the one that’s supported on the exchange because your bank starts making money from you on the exchange rate they use to convert your money to that other currency.
How this can be fixed? Find out on the next page …
A few possible solutions are:
1. Mining
It’s generally accepted that electricity cost in Kenya, and by extension Africa, is too expensive to use to mine cryptocurrency but that statement is just not true. While it’s true that you could mine profitably in other parts of the world you can still mine profitably here. A quick back-of-the-envelope calculation shows that if you were to purchase the latest Antminer, and use it to just mine bitcoin at just the peak electricity cost in Kenya, it is possible to make your money back.
2. Remittances
We already have people that are taking advantage of the negative transfer fee that exists when you send money to Africa — increasing that number could bring down the price of bitcoin in Africa.
Remittance costs to Kenya using companies like Western Union and MoneyGram, from UK, cost about 6% of the money being sent so if someone in the Diaspora is holding $100 and wants to send it, only $94 actually gets to the recipient. But with the difference in the price of bitcoin between Kenya and the Western countries, it’s now possible to get a negative transfer fee: that is, someone wants to send $100 but more than $100 will actually get to the recipient.
3. Exporters opting to get paid in bitcoin
This would make sense to them, firstly because they get negative transfer fees when they get paid from abroad. Secondly, because they get paid in a currency they easily convert to a local currency but can do so much with if they have to do business across the border for example.
4. FDI coming in bitcoin
For the same reasons exporters would/should want to get paid in bitcoin, African companies/startups with offshore investors could/should also opt to have investment money sent in bitcoin.
5. More cryptocurrencies apps being launched on the continent
Bitcoin was the first cryptocurrency and it was designed to solve a specific problem: allowing online payments to be sent directly from person to person without going through a financial institution. However, bitcoin is not the only player in the game. There are hundreds of other cryptocurrencies that work in a way that is similar to or was inspired by bitcoin and each of these cryptocurrencies solve a very specific problem for either a specific market or a multi-sided market.
There are 87 other cryptocurrencies that have a market cap that is greater than $1million.
Cryptocurrencies are not hard to convert to bitcoin. Getting more cryptocurrencies being developed on the continent to solve problems that are specific and unique to the continent will increase the bitcoin in circulation on the continent and this will reduce the price of bitcoin on African exchanges.
To those wishing to venture into that space, David Johnston has some excellent whitepapers on the best practices one should follow when launching their own cryptocurrency and on where these cryptocurrencies get their value from.