Bitcoin prices are on the rise nowadays, having at least a 20 to 30% increase in just a few days alone. That is already quite impressive but some places, like Zimbabwe and Indonesia, have an additional 30 to 40% premium for bitcoin in local exchanges.
Why is this so? Is there market manipulation going on behind the scenes? Is this an artificial rising of prices?
To put it simply, the reason why such a big premium is present is due to the law of supply and demand.
What complicates this matter is the local environment, the dynamics between the buyer and seller, and finally bitcoin itself.
The local environment
The Indonesian Rupiah has been in an inflationary direction since its own financial crisis. In 2015 alone, the Indonesian Rupiah plunged more than 80% and it is still trying to recover its losses today. This is partly because Rupiah weakness and partly on the strength of other currencies, be it a fiat currency like the US dollar or cryptocurrencies like bitcoin and Ethereum.
Meanwhile, in Africa, the Zimbabwean dollar has been suspended indefinitely since April of 2009. In fact, it was reported by Reuters that the local currency in Zimbabwe is a lot more difficult to use. It is also interesting to note that the US Dollar and the South African Rand are the de facto main currencies in Zimbabwe.
Due to the precarious environment, some local cryptocurrency exchanges have to deal with a lot of currency risk, not only to get bitcoin but also because they have to cover operational expenses with a local currency that is very volatile and unreliable.
This has led to a greater demand for bitcoins as it does not have a centralised body that can artificially raise its price. Given the rarity of Bitcoin in the country, the price premium reflects its scarcity.
The dynamics between buyer and seller
One way to get bitcoin is to actually mine it using a GPU or other devices called “Asics” which are developed specifically for Bitcoin mining. Most miners or mining pools are located in countries such as China that have a lower cost of electricity and hardware.
As more miners join the global mining pools, the difficulty in mining Bitcoin increases substantially. Not only does the difficulty increase but the mining rewards in Bitcoin also decrease.
This has discouraged bitcoin miners, especially in the African continent, from entering the scene. This translates to a much higher difficulty in acquiring bitcoin, since bitcoin had to be brought in from outside the borders.
This can lead not only to the transaction fees for sending in, but the operational task of finding outside sellers which makes business operations longer and therefore costlier.
Bitcoin was made with scarcity in mind. It has a limited number of only 21 million coins that was capped from the start. This has made bitcoin naturally scarce.
Moreover, recent moves by the likes of the CBOE and the CME to offer Bitcoin futures has given further legitimacy to the digital currency. This has given bitcoin increased perceived value, pushing the prices higher.
Hence, devoid of local factors, Bitcoin is an immensely valuable asset. Now add unique local factors to the mix as well as the difficulty in getting a supply of bitcoin, you can see how a 40% premium in Golix or Luno is not excessive but normal.
As long as demand for Bitcoin remains high in countries that have uncertain economic fortunes, the premium will persist.
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