African markets

Digital Assets and African Markets

Opportunities to invest in Africa have been missed in every cycle as investor fear of the unknown outweighs market fundamentals and clear signs of growth. While there is certainly risk and volatility in African markets, it is often not calculated or approached in the same way as risk and volatility in other markets. In some regions and sectors, investors are running into volatility to earn a return. African volatility is not seen comparatively by investors. The lack of investment in Africa, which I have already discussed, has had a serious impact on financial infrastructure, economic development and general growth across the African continent.

One of the risks always mentioned about investing in Africa is currency volatility. Currency volatility refers to the frequency and magnitude of changes in the value of a currency. Low-volatility currencies are relatively stable and include assets like the US dollar, Swiss franc, and euro. On the other hand, currencies with high volatility tend to have an unstable value, in particular compared to the “Western” currencies that I have just mentioned.

Africa is home to several highly volatile currencies, including the South African Rand and the Zambian Kwacha. There are several reasons why African currencies are facing volatility issues. On the one hand, many countries in Africa have markets mainly centered on commodities such as oil, copper or gold. When the price of these resources fluctuates, the currency reacts accordingly. Additionally, global economic changes tend to affect African currencies disproportionately. In 2018, when the Turkish lira soared on trade war fears, investors spooked away from the rand because they feared all emerging market currencies would see a drop.

Yet, this volatility is seen as desirable and exciting in increasingly popular asset types like digital currencies. The largely decentralized and sometimes deregulated world of digital currencies offers buyers the opportunity to be part of something new that challenges traditional financial models. However, this often comes at a cost. From November 2021 to January 2022, the value of Bitcoin

BTC
, one of the most well-known cryptocurrencies, fell from $69,000 to $35,000, a drop of more than 40%. A single tweet caused a 10% increase in the price of Bitcoin in a single night, which is simply unheard of in the traditional investment sphere. Despite this, crypto adoption has seen explosive growth over the past few years. If volatility in crypto is accepted and, to some extent, sought after, why isn’t the same true for African currencies?

It stands to reason that differences in how volatility is perceived can be attributed to the investing parties. Large corporations and banks looking to expand on the African continent are looking to expand their largely stable business offerings. These institutions have a no-frills reputation that is instrumental in maintaining their compliance, certifications, and ability to protect people’s money. On the other hand, crypto investors tend to be young, diverse, and willing to try something new. It wasn’t until the space matured that big banks like JPMorgan Chase

JPM
and Bank of America

BAC
invested in blockchain startups and established crypto research arms. Similarly, investment banking group Goldman Sachs has announced that it will restart its crypto trading operations. Even the world’s most traditional financial institutions are intrigued by the “volatile” crypto world.

Another essential thing to consider is that all asset classes have degrees of risk. While stocks like Apple

AAPL
and Walt Disney are considered “safe” large-cap stocks, widely volatile penny stocks are also a popular investment for some. The WallStreetBet meme stock craze last year showed that the traditional investment path is not immune to surprise upheavals. In crypto, stablecoins and CBDCs are easier ways to enter the space, compared to new tokens or NFTs fueled by pop culture trends. To complete this comparison: in Africa, it is possible to invest intelligently in local economies and businesses without exposing yourself to significant risks. Building infrastructure on the continent will actually help reduce long-term risk, a win-win situation. However, investing in sectors closely linked to world events or supply and demand may prove more precarious.

To sum up: Crypto and African currencies both present volatility risks, but also offer unique opportunities. There will always be differences in the stability of assets in the financial world. This does not mean that these currencies are bad, less important or less worthy of trading. They can be risky, but they also have the potential to build new and better infrastructure, grow economies and contribute to better lives. Crypto shows us that healthy, growing markets can also be volatile. After all, investing, in its purest form, is about risk versus reward. And with crypto, we see that concerns about volatility risk can instead become conversations about opportunity. When you invest in crypto, you are part of a new approach to finance that aims to be accessible to everyone. When you invest in Africa, you are contributing to a continent with incredible innate potential for growth. Taken together, African currencies and digital assets have almost limitless opportunities.