Bitcoin arbitrage is back. It dropped out of favour in the last couple of years as crypto arbitrage providers shifted from Bitcoin (BTC) to stablecoins, which are facsimiles of real currencies such as the US dollar, but using blockchain technology.
Examples of stablecoins are USD Coin (USDC) and True USD (TUSD), which are backed 1:1 by real dollars.
Bitcoin, like US dollar-backed stablecoins, traditionally trades at a lower price in overseas markets, which can then be sold for 1% to 4% more in South Africa. Arbitrage (buying an asset on one market and selling at a higher price on another market) has long presented opportunities for profit in countries with exchange control, like South Africa. Recently you could buy BTC for R604 000 on the Kraken exchange, based in the US, and sell it on Luno in South Africa for R619 000, a difference of about 2.5%.
You could do the same thing with stablecoins, though the profit was slightly less, typically at about 2% to 2.2%.
The following chart shows that the net profit (after costs), represented by the yellow line, dropped from 2% to 3% in late 2020, to 1% to 1.5% in early 2022, and now appears to be on a slowly increasing trend.
Assuming the maximum allowable foreign exchange allocation for arbitrage of R11 million, a net profit of 1.5% per trade is equivalent to R165 000 over the course of a year. For a married couple with R22 million available for arbitrage, that profit is potentially doubled.
The emergence of cryptos in recent years created arbitrage opportunities for South Africans, using their Single Discretionary Allowance (SDA) and Foreign Investment Allowance (FIA). The SDA requires no Reserve Bank approvals and allows participants to export forex of up to R1 million a year, and the FIA – for those with tax clearance from SA Revenue Service (Sars) – is worth R10 million a year.
That’s R11 million a year, or R22 million for a married couple. That doesn’t mean you need R11 million in the bank to arbitrage. Future Forex, one of SA’s leading crypto arbitrage providers, requires a minimum investment of R100 000, though R200 000 to R250 000 is more ideal as economies of scale kick in, allowing for a slightly higher profit. The initial sum can then be traded multiple times to a cumulative amount of R11 million over the year.
Source: Future Forex
“We’ve developed a solution which allows us to perfectly hedge Bitcoin arbitrage, which typically offers our clients a 10% to 30% higher profit per trade cycle compared to stablecoins,” says Harry Scherzer, co-founder of Future Forex.
“We were doing it with stablecoins, now we’ve further enhanced our offering and can do it with BTC as well, which often has a slightly higher spread. There are times when USDC is better, so we can pick and choose. We did this because we want to maximise our clients’ returns. After fees, net BTC returns are typically about 0.3% to 0.4% better than stablecoins per trade. We are also fully hedged when trading BTC, so the profit is locked in from the moment we initiate the trade.”
Are there risks?
The purpose of arbitrage is to reduce risks as far as possible by having minimal or no exposure to market movements. That’s not to say there aren’t risks, the principle one being counter-party risk – principally the risk that the overseas exchange being used for arbitrage fails while the trade is underway.
“We have chosen our overseas partners very carefully, so we rate that risk as very small,” says Scherzer. “We are fully hedged in all our trades, so our clients are not exposed to the risks of market price movements, which are far more significant risks.”
There are two primary risks in arbitrage:
- The risk of an adverse move in the BTC price while the arbitrage trade is underway (trades are usually completed in six to eight hours)
- Adverse moves in the rand-US dollar exchange rate. Rands must be converted to US dollars and shipped abroad – a process that takes a few hours – so any sharp swing in the exchange rate can impact the eventual profit or wipe it out altogether.
Future Forex, an authorised Financial Services Provider (FSP 51884) for currency remittance services, has developed a battle-tested system which has processed over R1.9 billion worth of trades to date and is able to mitigate these risks.
“We have third parties providing a BTC-USD rate and BTC-ZAR rates. We can lock in those rates at the start of the trade,” says Scherzer.
What is a reasonable profit expectation?
Josh Kotlowitz, co-founder and CTO of Future Forex, says crypto arbitrage spreads have narrowed in recent years as more South Africans woke up to the arbitrage opportunity.
A realistic expectation is a net profit of 1% to 1.5% per trade, which can accumulate to over 100% per annum, depending on the number of trades performed over the year, he adds.
“When onboarding clients, we ask what their desired net profit level is, and we will only trade when that profit level is available in the market. Some people might say they want a net profit of 3% on all trades, and we will explain to them that such opportunities may come around only a few times a year, and guide them on how to set a target that maximises their returns over the course of the year.”
Once on-boarded, the trading process is fully automated, and clients are able to see the results of the trade on a daily basis.
“Virtually all clients understand that we’re the experts and we will judge when it is best to trade, and our business model is such that we only profit when our clients do.”
Costs
Future Forex does not charge any management fees and rather shares in the profits earned. There are no hidden fees or costs. This profit-sharing model means clients’ interests are aligned with those of the company.
You can register here.
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