The ongoing meltdown in the cryptocurrency industry could push an estimated four million Kenyans who hold the digital assets deeper into losses as the leading crypto Bitcoin struggles to stay above the key level of Sh2.3 million ($20,000).
The crypto market, known for its wild price swings, has shed more than half of its value since November last year as investors pulled out money from riskier assets amid worries over soaring inflation and rising interest rates.
This has hit the estimated four million Kenyans, mainly young and small traders, who in recent years have flocked to cryptocurrencies in the hope of quick returns, despite warnings from regulators like the Central Bank of Kenya (CBK) that the emerging assets can be high risk.
Blockchain analytics firm Chainalysis, which ranks countries on crypto adoption, revealed that Kenya has about four million crypto-investors. Chainalysis relies on web-traffic data to P2P platforms to track crypto usage in different countries.
The firm, which tracks crypto flows for financial firms and US law enforcement, reckons that Kenya is among top dealers in peer-to-peer cryptocurrency platforms, which allows traders to transact directly with one another without the need for a centralised third party to facilitate the transactions.
The four million is higher than the 3.07 million Kenyans who are in formal employment, signaling investors are students and workers in the informal sector.
The sector is not regulated in the country, which makes it difficult to establish value of digital assets held by the mostly tech-savvy Kenyans, but the amount could run into billions.
Kenyan investors buy cryptocurrencies to preserve their savings, carry out international transactions either for individual remittances for those working in places like Europe and North America or for commercial use, such as purchasing goods to import and sell, says Chainalysis.
The payment of imports through cryptocurrency is seen as convenient and quick because the traders no longer have to buy dollars using Kenya shilling or fork out fees to money transfer firms like Western Union.
But the recent turmoil is inflicting pain on these retail investors as dealers termed the market swings normal.
“The sell-offs should not really worry crypto investors. What is happening is that some are moving their cryptos to less risky assets, just like what we have seen in the traditional financial markets,” says George Mwakisha, Kenya lead representative for Binance-- the world’s biggest crypto exchange.
Bitcoin, the world’s biggest cryptocurrency, dropped on Saturday to as low as $17,592.78, falling below the key $20,000 level for the first time since December 2020.
It picked up slightly during London trading hours on Monday, at around $20,510. But it has still lost 55 percent of its value this year and 35 percent this month alone in the cryptocurrency sector’s latest meltdown.
Bitcoin’s fall follows problems at several major crypto firms. Further declines, market players said, could have a knock-on effect as other crypto investors are forced to sell their holdings to meet margin calls and cover losses.
This has made it difficult to gauge the scale of retail investors’ pain from the crypto plunge and the effects on future appetite given the cloudy nature of the market.
Cryptocurrencies are unregulated in many countries and their legal status is unclear, meaning there is no safety net and little recourse if you lose funds.
“Cryptocurrencies are new and so most people are operating and commenting from a point of little knowledge. But for millions of unemployed young Kenyans including university students, it is an investment and earns them an income,” Mr Mwakisha said.
CBK holds a different opinion from the Mr Mwakisha.
Central bank governor Patrick Njoroge says cryptocurrencies pose risks to financial stability, arguing that digital currencies could solve problems such as bringing the poor into the financial system or cutting transaction costs.
CBK in February invited the public for views on the potential introduction of a digital currency to offer some benefits especially in reducing cross-border payments costs.
But crypto assets have proved popular in Kenya despite central bank warnings about their risks.
“There was a lot of hype,” Njoroge said of cryptocurrencies at a virtual event moderated by the International Monetary Fund’s Africa director Abebe Aemro Selassie in June.
He suggested crypto assets could be regulated as a “wealth product”.
The fall in crypto markets has coincided with a slide for equities, as U.S. stocks suffered their biggest weekly percentage decline in two years on fears of rising interest rates and the growing likelihood of recession.
Bitcoin’s moves have tended to follow a similar pattern to other risk assets such as tech stocks.
The overall crypto market capitalisation is roughly $950 billion (Sh102.1 trillion), according to price site Coinmarketcap, down from a peak of $2.9 trillion (Sh340.6 trillion) in November 2021.
Investing in crypto-assets such as bitcoin picked during the pandemic alongside nonfungible tokens (NFTs) driven by the perception of safer assets and social media frenzy.
The meteoric rise of leading blockchain tokens elicited excitement attracting newcomers who wanted to learn and invest while some individuals saw it as a safe place to put money.