It’s a question Moneyweb readers have asked on several occasions: how does South African crypto arbitrage compare with other investments?
We preface the following analysis with the disclaimer that historical returns are no guarantee of future returns. That said, crypto arbitrage has shown itself far less prone to the volatile swings associated with a direct investment in cryptos like Bitcoin, or indeed the stock market.
Taking R200 000 as our starting investment amount, and January 1 2021 as our start date, a year and a bit later Future Forex’s crypto arbitrage profit would have grown to R502 398, according to Future Forex.
Impressive as that is, it is lower than the figures achieved in previous years when the crypto arbitrage profit averaged 2-4% per trade, against the current average net profit of 1-2% per trade.
Compare that with a direct investment in Bitcoin (BTC), which grew 58% since the start of 2021, or the S&P 500, which would have grown the starting capital of R200 000 to R239 162, about 20% up. The same investment in the JSE would have ended up flat for the same period.
A key point to notice is the lack of volatility in the crypto arbitrage returns in the graph above. That’s because each crypto arbitrage trade takes six to eight hours and is then banked, so traders are not exposed to market volatility.
What are the risks?
There are risks, but those providing this service attempt to eliminate as many of these as possible.
The main risk is that either the currency or the crypto price moves sharply while the trade is underway (which can take several hours).
Say you bought BTC at R640 000 and it dropped 1.5% to R630 000 before it could be sold in SA. That could theoretically wipe out your expected profit. And if, while waiting for the BTC to arrive in SA, the US dollar-rand exchange rate dropped from R14.80 to R14.60, your BTC would be worth roughly 1.4% less in rands.
Fortunately, these risks are taken care of by crypto arbitrage provider Future Forex (also an authorised Financial Services Provider for currency remittance services), which hedges the currency and crypto exposure, so any profit opportunity is locked in at the start of the trade.
One remaining risk is that one of the counter-parties used by Future Forex goes bust while the trade is underway – a remote possibility, says qualified actuary and Future Forex CEO Harry Scherzer, given the deep due diligence performed on all its overseas partners.
”Having eliminated the market risks entirely through our fully hedged investment system, we’ve spent a lot of time and effort selecting the best and most trusted partners for our crypto arbitrage service, to ensure that the risk of counter-party failure is very low. We have performed extensive due diligence on third parties, ensuring that they are credible and reliable before engaging with them in our arbitrage process.”
What exactly is crypto arbitrage?
Crypto arbitrage involves exploiting differences in crypto prices between local and overseas exchanges. Over time, crypto arbitrage providers found it more efficient to trade in stablecoins such as USD Coin (USDC), which is backed 1:1 by the UD dollar.
Future Forex recently announced that it has reintroduced BTC to its stable of arbitrage assets, as BTC often offers slightly better profit opportunities.
Trading involves the purchase of US dollars or euros and shipping these to an overseas exchange for the purchase of cryptos, and then shipping these to SA for sale on a local exchange at a higher price. All this is typically done in less than a day, and repeated again when there is a suitable arbitrage ‘gap’ or profit.
Why crypto arbitrage opportunities exist
These price differences (or arbitrage) exist because of exchange controls, which make hard currency assets like BTC and the US dollar more expensive in SA. That’s because South Africans are restricted to R11 million a year that can be directed to foreign investments such as crypto arbitrage.
This foreign investment allowance is made up of a Single Discretionary Allowance (SDA) and a 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 the South African Revenue Service (Sars) – is worth R10 million a year.
Will the crypto arbitrage market disappear?
It’s unlikely that the crypto arbitrage market will disappear, says Scherzer. “It’s a market that’s been around for more than a decade, and while the profit potential in crypto arbitrage has reduced over the years as more people participate in it, the profit potential has been a rather consistent 1-2% per trade over the last year. Sometimes that gap disappears, but then reappears after a while. So I see it being around for many years to come.”
What is a realistic profit expectation?
Future Forex clients are allocated a dedicated relationship manager to help them with the onboarding and KYC (Know Your Customer) processes, and to offer advice and guidance thereafter. Clients are able to nominate their preferred net profit level (after costs), but these need to be in line with what the market is offering in order to maximise returns. Demanding a net profit of 3% on a single trade is unrealistic (though it is likely to happen once or twice in the course of a year), so a more realistic and overall profitable level is a net profit of 1-1.5% on a trade.
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.
Where to register: https://futureforex.co.za/register/
Brought to you by Future Forex.
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