Bitcoin is by far the most controversial asset in all of finance. I can’t think of a more polarizing asset in recent history. Even the debates between the gold bugs who thought large scale asset purchases from central banks was going to cause hyperinflation and the interventionist economists who urged even more QE did not get as bitter as the debates between bitcoin evangelists and bitcoin detractors is getting. Now I am not going to weigh in on the debate but I have observed an interesting phenomenon about bitcoin that should explain a bit of its appeal for so many people.

Investors in Ghana, like in many other developing countries, have always been worried about the problem of currency depreciation. This has resulted in many businesses and individuals taking advantage of foreign currency accounts in domestic banks in order to hedge against this depreciation. According to the Banking Sector Developments Report – September 2020, 27% of total deposits in domestic banks was in foreign currency.

Obviously most of these deposits are not paying any interest, and therefore there is a pent-up demand for dollar assets that generate returns. It is not difficult to see why bitcoin becomes so attractive in such an environment. Despite its eye-popping volatility, bitcoin has held up as a store of value much better than many people (myself included) expected. For many people unable to invest in US stocks and domestic dollar bonds, bitcoin offers an alternative means of gaining exposure to dollar-denominated assets.

Perhaps nowhere is this phenomenon as conspicuous as in Nigeria. Years of poor oil prices have slowed economic growth and taken a toll on the Central Bank of Nigeria’s (CBN) foreign currency reserves. The CBN has issued many capital controls in an effort to maintain the value of the Naira, controls that have made it difficult for ordinary citizens to have access to foreign currency through regular channels. It is no surprise then that Nigeria is the second largest cryptocurrency market in the world after the US. The recent CBN directive to banks prohibiting trades in cryptocurrencies and even asking banks to close accounts of exchanges and individuals dealing in cryptocurrency has come as a major setback.

Banning bitcoin and other cryptocurrencies will not solve the underlying problem of a lack of faith in currencies of developing countries. Many of the governments of these countries are loaded on dollar-denominated debts from Eurobonds and so it would be quite ironic to try to prevent their citizenry from diversifying away from the domestic currency. As long as people have a way to get exposure to dollar-denominated assets, they will gain that exposure be it through bitcoin, US equity ETFs or FAANG stocks. The burden is on governments and central banks of developing countries to do the hard work of restoring faith in their currencies.