Crypto arbitrage is growing in popularity, but it’s an opportunity that may not be around forever. Crypto regulations are coming and that may close the opportunity to profit from price differences between cryptos on overseas and local exchanges.
While investing in cryptos is high risk and prone to volatile swings, crypto arbitrage seeks to eliminate these risks by exploiting price differences between crypto assets like bitcoin between overseas and SA exchanges.
That price difference typically ranges between 1.5% and 2.5% and is a function of SA exchange controls, which limit South Africans’ ability to access hard currencies such as the US dollar.
A concern among arbitrage traders is what impact crypto regulations will have on the market. Regulations are coming and when they do – admittedly likely in two or more years from now – institutional money will likely find its way into the market and potentially eliminate the arbitrage premium.
“Regulations may mean the crypto arbitrage gap will close practically overnight, because we could see a flood of institutional money coming into the market,” says Harry Scherzer, qualified actuary and CEO of crypto arbitrage provider Future Forex.
“This is an opportunity which could be relatively short-lived, though I do see crypto arbitrage being around for at least another two years.
“The penny is starting to drop, and we are seeing more and more people signing up every day,” he adds.
“In the early days, people were concerned about the legalities of crypto arbitrage, and the risks associated. We’ve addressed all of these concerns by making sure that we are fully compliant, by acquiring an FSP [Financial Services Provider] licence and hedging against all market risks.”
Will crypto arbitrage disappear completely?
Because of exchange controls, internationally-priced assets typically trade at a premium in SA, something arbitrage traders have known for decades. For example, SA gold stocks would trade at a premium on the JSE over the London Stock Exchange. That arbitrage profit generally lasts only a few minutes before traders move in and buy stocks in London and sell on the JSE to lock in the profit.
When it comes to cryptos, the arbitrage opportunity has been around for a decade. You can buy bitcoin on an overseas exchange and sell it on a crypto exchange in SA generally for a premium of 1.5% to 2.5%.
The danger of DIY arbitrage is having the rand-US dollar or euro exchange rate move against you, or the bitcoin price itself, while the trade is underway.
Crypto arbitrage providers like Future Forex, which have processed over R4 billion worth of arbitrage trades, have taken those risks away by hedging both the forex and crypto prices. In other words, the profit is locked in as soon as the trade is initiated.
Scherzer says an influx of institutional money may collapse the crypto arbitrage market in minutes, just as it happens when arbitraging stocks between the JSE and LSE. But even then, localised events – such as a drop in the value of the rand – can cause the arbitrage gap to reappear.
“Once institutional money starts to flood into the market, which we expect when regulations allow them to invest in this asset class, then the arbitrage gap will likely be eliminated. But that gap has a tendency to reappear when special circumstances force bitcoin prices out of alignment between overseas and local exchanges.”
Where costs are aligned to customer profits
Future Forex is able to switch between arbitraging bitcoin and USDC (a US dollar-backed stablecoin) and BTC, depending on which offers the widest profit margin. This allows the company to grab whichever crypto asset offers the widest premium.
“What often happens in the crypto markets is that the bitcoin or USDC arbitrage premium will momentarily spike to 2.5%, 3% or even higher and we are able to grab that, even if it exists for just a minute,” says Scherzer. “In this way we are able to maximise profits for customers.
“We monitor these arbitrage spreads 24/7 so we never miss an opportunity like this.”
A realistic expectation for crypto arbitrage clients is a net profit, after costs, of 1% to 1.5%. That can accumulate to over 100% per annum, depending on the number of trades performed over the year. The net profit increased to 1.5% to 2% for periods during the recent crypto price crash, though this was the exception rather than the rule.
Future Forex earns its profits only when the client makes money. It takes its profit share on a sliding scale, depending on how much is invested.
Scherzer says the minimum to start crypto arbitrage trading with Future Forex is R100 000, though profits increase substantially if the starting amount is R200 000 or more, because that means fewer trades and therefore less costs per trade. There are no management or other fees charged.
Using foreign currency allowances to trade
Clients have access to two sources of foreign currency to participate in crypto arbitrage trading. The first is the single discretionary allowance (SDA) of R1 million a year, for which no permissions are required, and the foreign investment allowance (FIA) of up to R10 million a year, available to those who have tax clearance from the SA Revenue Service (Sars). That’s R11 million a year – and double that (R22 million) for a married couple – available for crypto arbitrage.
“We perform the applications to Sars for FIAs free of charge for our clients, and our in-house tax team and partner tax practitioner ensure that these applications are approved as quickly as possible,” adds Scherzer.
You can register here.
Brought to you by Future Forex.
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