Overview

Africa is set to be the next battleground for major crypto asset exchanges, as the conditions on the continent are favorable for virtual currency, and as a leading economy, South Africa could lead the charge in this digital transformation. We will examine how the economic situation and the high inflation in Africa could shape the local crypto markets, and why the people on the second-most-populous continent were opening their interest in crypto investments. South Africa in particular, seems ready to ride the waves and thrive in the crypto world.

Promised Land?

The continent of Africa contains 54 countries, it’s the second-largest and second most populated continent in the world, just behind Asia in both categories. In the world of traditional investment, Africa may not be a bright spot, but economic growth has become increasingly noticeable. Data from the International Monetary Fund shows that Africa’s real GDP is expected to have an annual growth of 3.6% this year, that’s higher than the global growth forecast of 3.3%, and just behind China’s 6.3% estimation. (Figure 1) The IMF also forecasts that by the year 2023, Africa’s economic expansion will accelerate to 4.1%.

Figure 1: Real GDP Growth (Annual % Change)

Source: IMF

Inflation in Play

Africa’s growth picture may look lucrative for some investors, however, the inflation problem could hamper the growth. Africa’s average inflation rate has been much lower and contained if you look with a longer time frame (figure 3), however, some of the African countries’ inflation remained extreme due to political and economic instability, such as Zimbabwe, South Sudan, Sudan, Liberia, and Angola. The inflation rate of these countries could be double or even triple digits.

Figure 2: World Inflation Rates (Annual % Change) 

Source: IMF

Figure 3: Inflation Rate Comparisons

Source: IMF

When the inflation rate is too fluctuated or surge drastically, it will be hard for businesses to price their goods and will significantly reduce consumers’ buying power. This is where bitcoin and crypto come in. According to the United Nation, the high inflation landscape plus the improving economic situation provided an ideal environment to foster the crypto markets in Africa. Africa Renewal, a United Nation publication, citing blockchain experts saying many African countries use Bitcoin as a tool to counter the hyperinflation in their country. The report also says Botswana, Ghana, Kenya, Nigeria, South Africa, and Zimbabwe were among the African countries that have the highest bitcoin penetration rates, other countries like Uganda were also seen gaining interest in cryptocurrency.

Increasing Crypto Interest

We reviewed how the improved economic condition and inflation environment encouraged cryptocurrency growth in Africa, and this expansion seems also supported by the African people. Figure 4 shows that the search popularity of the term “Bitcoin” in the Google search engine over the past 12 months, and it is surprised to see half of the top 10 were African countries.

Figure 4: 12-Month “Bitcoin” Google Trends (As of Sept. 10 2019)

Source: Google Trends

Weak Currency Leads to High Crypto Ownership

The strength of a country’s currency could add another dimension to the crypto development in Africa. A recent Statista survey shows that South Africa alongside Turkey, Brazil, Colombia, and Argentina were among the highest cryptocurrency ownership countries (figure 5), almost 20% of the respondents said they have used or owned crypto assets in 2019. Another similar study from We Are Social and Hootsuite also indicates that 10.7% of internet users in South Africa own cryptos. This was the highest ratio in the world.

Figure 5: 2019 Cryptocurrency Ownership by Country

Source: Statista

Correspondingly, the currencies of these five mentioned countries were some of the weakest performers against USD in recent years. Figure 6 is the 5-year chart of USD against ZAR, TRY, COP, ARS, and BRL, and it’s not hard to see they have been trading at/near their 5-year lows. So, it’s reasonable to presume that the demand for countering FX devaluation could be high among consumers of these weak-currency countries, and bitcoin could be the answer for them.

Figure 6: USD against ZAR/TRY/COP/ARS/BRL 5-Year Chart

Source: Tradingview

South Africa’s Edges

South Africa is the second-largest economy in Africa just after Nigeria. Although Nigeria has been enjoying a faster growth in recent years, however, the South African economy was more diversified, while Nigeria more relies on the energy sector. In the past, South Africa has been mainly focused on mining and agriculture sectors, but in recent years, the country advanced its economy by shifting focuses on tourism, financial services, and the tech sector. Furthermore, South Africa is generally more accessible for foreign capital, which gives the country a slightly more edge when it comes to investment.

On Regulatory Front

Regulatory issues have been always a major concern for crypto and digital asset exchanges and custody providers when it comes to expanding their businesses into new territory, and the regulatory landscape in South Africa, or broadly speaking in Africa, could be a major factor that drives the crypto industry forward on the continent.

According to a document from the South African Reserve Bank, the central bank currently does not oversee, supervise or regulate crypto assets, but added that it will continue to monitor this sector as it evolves. The SARB released the Position Paper 02 regarding its stance on crypto assets in 2014 and the central bank stressed that the Paper remains current and relevant.

The Paper highlighted that the “increasing merchant acceptance, integrating existing conventional payment instruments with decentralized convertible virtual currency, and promoting the advantages inherent in such systems. Thus, there is potential for real growth of Bitcoin in its current operational environment.” This underlines South Africa’s openness and recognition of bitcoin and in a broader sense cryptocurrency.

However, the lack of a full regulatory structure won’t complete the whole picture. In January 2019, South African Finance Minister Tito Mboweni said the country is looking for a unified intergovernmental cryptocurrency regulatory framework, and established a working group to explore the opportunities of tokens and blockchain technology within the country. Mboweni expects that the report will be released this year.

Conclusion

Africa has laid the foundations for the crypto industry to thrive on the continent, its high inflation economic characteristic encourages the demand for value preservation and bitcoin and other cryptocurrencies could be an answer for consumers in Africa. South Africa, in particular, could become a leader in this crypto transformation, read “Decentralizing South Africa” for more about why OKEx values the South African market and its upcoming strategies in Africa.


Disclaimer: This material should not be taken as the basis for making investment decisions, nor be construed as a recommendation to engage in investment transactions. Trading digital assets involves significant risk and can result in the loss of your invested capital. You should ensure that you fully understand the risk involved and take into consideration your level of experience, investment objectives and seek independent financial advice if necessary.


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