The price of the same asset in different countries, can be radically different. There are many reasons for these distortions, but when it comes to bitcoin, it looks especially weird. After all people are supposed to be able to buy and sell their coins freely through exchanges at market price. The sheer force of demand and supply is supposed to set the price. In Nigeria this does not seem to be the case. At a glance, it seems that investors can engage in arbitrage with their coins in this African nation. However market distortions might not yield such a clear cut case.

Macroeconomic Conditions for Bitcoin Arbitrage in Nigeria

A simple look at localbitcoins.com in Nigeria, will show that bitcoin prices range between 370,000 Naira – NGN – and 400,000 Naira. Depending on which USD to NGN rate Naira holders use, the value of a single coin can vary from $900 USD equivalent to about $1,250 USD. This is where the opportunity for arbitrage is, in theory. Right now, the price of bitcoin is around $750 USD, so in theory someone could sell a coin and make at least an additional 20% in US Dollar terms.

Screenshot of bitcoin prices in Nigeria from localbitcoins.com. Sellers are asking for more than the $750 USD bitcoin is worth right now elsewhere.

This simple calculation only tells one side of the story. The main reason why bitcoin can fetch upwards of $900 USD in Nigeria, is because the oil dependent country placed capital restrictions on the purchase of foreign currency. Lower oil prices have pushed the value of the Naira down, so many people flock to other currencies in order to maintain the value of their money – they hedge their risk. This means that investors seeking to gain from arbitrage, might have to take the profit in Nigerian Naira. Local investors with economic interests in Nigeria, might be ok with this, but international sellers might want to think twice before they sell their bitcoin. The seemingly easy to gain 20% premium, is relative.

Calculating the Real Price of Bitcoin in Nigeria

The USD to NGN rate does not float freely. In Nigeria, there is an official exchange rate for foreign currency buyers, and then there is the unofficial, black market rate. This is precisely what is generating the price distortions and arbitrage on bitcoin prices, and the reason why profits from arbitrage are relative. This is how the BTC to NGN ratio works out in terms of US Dollars using the two different rates:

With the official rate – 1 USD = 315 NGN. That means that if 1 BTC = 400,000 NGN, then 1 BTC is worth roughly $1,270 USD in Nigeria.

With the unofficial rate – 1 USD = 465 NGN. That means that if 1 BTC = 400,000 NGN, then 1 BTC is worth roughly $860 USD in Nigeria.

Official and Unofficial Exchange Rates

The calculation shows that actually, in the unofficial markets, bitcoin prices are much closer to the prices that sites such as coinmarketcap.com quote. Bitcoin at $860 USD makes much more sense, given that prices elsewhere are at around $750 USD, because the problem is the foreign exchange regime as a whole. The demand for foreign currency must be outpacing supply, and given that the government placed restrictions on foreign exchange rates, then people must pay a premium in the black market to buy other currencies, including bitcoin.

Can Investors Profit?

There are definitely people who are profiting from the arbitrage. The same has happened before in other countries that restrict the amount of foreign currency that its citizens can buy. Venezuela is probably the most prominent example, and the bitcoin economy advanced there over the last few years. Nevertheless, investors thinking about selling their coins in Nigeria for a profit, will risk having to keep their profits denominated in Naira, just as Venezuelans keep their profits from bitcoin sales in Bolivars. They will find it difficult to take the money in US Dollars outside the country to buy some more bitcoin and make the same move again.

The Risk of Arbitrage

The Nigerian economy is oil dependent. Oil prices are down about 55% over the last 2 years, and there are no signs of recovery. Any abrupt change in the price of oil, or any other kind of sudden instability in Nigeria, can erase profits from arbitrage as well. Thus, investors who engage in this kind of arbitrage, have to be prepared to re-invest in Nigeria or risk losing their profits to a stronger US Dollar. There is not a clear cut case for profit from bitcoin price arbitrage in Nigeria.