Estimating Price and Exchange rate Hedging Elasticity of Cryptocurrency Demand in Nigeria

Abstract

This study examined the price and exchange rate hedging elasticity of cryptocurrency demand in Nigeria. To achieve the objective, the study employed Autoregressive Distributed Lag (ADRL) model to estimate both the short-run and long-run response of demand to changes in crypto price, consumer income and exchange rate. The Study found among others that cryptocurrency is demanded as a financial asset (either as money for exchange purpose or asset for speculative purpose). It was discovered that cryptocurrency price changes have significant impact on cryptocurrency demand but price inelastic. Meaning that a percentage changes in crypto price leads to less than proportionate change in cryptocurrency demand. It was also discovered that Nigeria real exchange rate has negative relationship with cryptocurrency demand meaning that as Naira real exchange rate to dollar is falling, the demand for cryptocurrency is rising. Other factors that are influencing cryptocurrency demand in Nigeria include consumer income, cryptocurrency popularity, and inflation rate in the country. The study concludes that while price plays an important role in cryptocurrency demand, fluctuations in cryptocurrency demand is less than the fluctuation in its price. The implication is that there are several other factors (structural issues) including real exchange rate movement that influences demands for cryptocurrency other than its price that policy makers should explore.

The implication of cryptocurrency volatility on five largest African financial system stability

“…Furthermore, Levulytė and Šapkauskie (2021) pointed out that the number of settlement points should be high enough for an instrument to serve as a medium of exchange. For example, Bitcoin is enjoying significant growth in acceptance and usage in El Salvador (Gupta et al 2020;Joseph et al 2022).…”

“…Research has also suggested that cryptocurrency must gain wider acceptance as a means of global exchange to be qualified as money (Wolla 2018;Jareño et al 2020). Whether cryptocurrency is money or a financial instrument, Joseph et al (2022) argued that cryptocurrency is essentially a financial instrument because money is a highly liquid financial asset.…”

“…Countries like Australia treat cryptocurrency more like a commodity than a currency, and regulations guiding transactions in cryptocurrency are handled in the capital market. Similarly, countries like the USA, Germany, and Canada-with a high level of cryptocurrency adoption-treat cryptocurrency as financial instruments that can act as money or a commodity depending on the purpose of the transaction and the medium of the transaction (Levulytė and Šapkauskie 2021;Joseph et al 2022).…”

“…While cryptocurrency has enjoyed wide reception and adoption from financial consumers, particularly in Africa, the technology often used as a financial instrument has become a severe concern for governments and monetary authorities worldwide. Evidence has revealed that cryptocurrency is susceptible to a high level of volatility in its price, facilitates terrorism financing and money laundering, and encourages corruption in developing countries (Halaburda et al 2020;Joseph et al 2022;Hasan et al 2022;Qiao et al 2023;Xu et al 2019). Due to their short history, limited regulatory oversight, and lack of established valuation models, these unique challenges from cryptocurrency mirror Knightian uncertainty affecting the region (Mao et al 2023).…”

“…This growth is consistent with KuCoin's report that cryptocurrency would rise to about 2670% in Africa in 2022 (Hall 2022). Urinalysis also revealed that the African continent ranks above others regarding cryptocurrency adoption (Hall 2022;Joseph et al 2022). Similarly, the African financial system is integrated mainly with other advanced and emerging market equity markets.…”