As cryptocurrencies gain traction in Nigeria, concerns about their impact on the stability of the financial system and their influence on investor sentiment are growing. The Central Bank of Nigeria (CBN), in a recent report, discussed the impact of Bitcoin and crypto on the Nigerian stock market as more Nigerians use crypto today than a decade ago.
Using the Granger causality test and ADF unit root tests, CBN noticed a few results in the relationship between the bitcoin market and the Nigerian stock market. The first test shows that “both stock returns and Bitcoin returns are stationary at levels.” Then the Granger causality test reveals that “movements in the past values of Bitcoin returns cannot be used to predict future stock returns.”
In addition to this, the report sheds more light on the connection between crypto and the stock market. It mentioned that despite the disruptions in the crypto market related to hacks, and the lack of a ripple effect on the global financial market, there are indications that due to the increase in popularity of crypto, it will begin to affect the global economy in the future.
“The Bitcoin market capitalization has significantly increased over time amid increasing demand in the Nigerian market,” there is an indication that the “correlation between Bitcoin prices and Nigeria stock returns is statistically significant.”
Bitcoin, the pandemic, and CBN
Speaking about the impact of crypto during the pandemic, it noted that globally Bitcoin’s volatility had a notable effect on the S&P 500. This reveals that the price of Bitcoin has a connection with investors’ behavior in the stock market.
“In this case, if there is a sudden drop in Bitcoin prices, it may make investors more risk-averse and cause a downturn in stock market investment,” it added.
The bank also acknowledged that despite the anticipated impact of the COVID-19 pandemic on stock markets, there was a correlation with the crypto market. Interventions by the Central Bank of Nigeria and global central banks were implemented to mitigate the effects on the economy and stock markets.
As a result, both crypto and stock prices experienced an upward trend, even in the face of challenging global economic conditions, indicating that investors had an increased risk appetite.
Regulatory differences
According to the CBN’s explanation, one crucial factor that sets the crypto space and stock market apart is the existence of distinct regulatory frameworks.
Furthermore, it emphasized the importance of conducting a comprehensive analysis of the crypto market’s impact on stocks, as the current report’s findings were limited in scope.
Another interesting point raised is that the growing demand for Bitcoin in the Nigerian market has led to a significant increase in its market capitalization. This suggests an intriguing correlation between Bitcoin prices and returns on Nigeria’s stock market that holds statistical significance.
