Cryptoization and volatility of the exchange rate in Nigeria

Abstract

This study aims to examine the impact of the cryptocurrency market returns, measured by Bitcoin and stablecoin market index returns, on the volatility of the Nigerian Naira. Noting that cryptocurrency returns are positively related to cryptocurrency adoption, this amounts to testing the impact of cryptoization on the exchange rate volatility of the Nigerian Naira. The study adopts an E-GARCH-X model to test the volatility impact of cryptocurrency returns with several controls using daily data from December 2017 to December 2024. It was found that cryptocurrency returns represented by Bitcoin returns and Stablecoin returns, proxied by a weighted return of the major stablecoins, contribute positively to the volatility of the naira. This result is robust even after accounting for global risk sentiment, the dollar-naira interest rate differential and country risk using the VIX index, Naira NIBOR and SOFR rate difference and the Global X MSCI Nigeria ETF as controls.