Don’t write off crypto arbitrage just yet.
It had been a painful few months for those doing arbitrage, with spreads narrowing to less than 1%. But then came the implosion of crypto exchange FTX and a sudden strengthening in the rand from R18.50 to R17.20 to the US dollar.
In the blink of an eye, the crypto arbitrage market bounced back to life, with spreads widening to 3.8% last week, and continuing to hover around 3% this week. The wider the spread, the more profitable the arbitrage trade.
Arbitrage is the exploitation of price differences in the same asset or commodity in different markets. For example, right now you can buy bitcoin (BTC) on overseas exchanges and sell it locally for a 2% to 3% profit.
Companies like crypto arbitrage and forex specialist Future Forex, an authorised Financial Services Provider for currency remittance services, are able to automate this process for you.
To do that as a South African, you must make use of your R1 million Single Discretionary Allowance (SDA), and your R10 million-a-year Foreign Investment Allowance (FIA) – for which you need tax clearance from the SA Revenue Service (Sars). As a complementary service, Future Forex assists clients in applying for the FIA, which is only available to those who have tax clearance from Sars.
The arbitrage premium exists because SA has exchange controls and limits the amount of money residents can export each year. That means people are willing to pay a premium for acquiring internationally-accepted assets such as stocks or BTC.
“People have been saying for years that the crypto arbitrage would continuously reduce in profitability, yet here it is again offering spreads of 3% or more on trades which take less than a day to complete,” says Harry Scherzer, qualified actuary and CEO of Future Forex.
“Arbitrage is a way to avoid the huge volatility we have seen in cryptos recently. We can avoid the market risks because trades are fully hedged to ensure profits are generated on initiation of each trade.”
Prior to the recent surge in the spread, Future Forex was still trading and delivering exceptional returns to clients, processing over R1 billion in October and delivering an average annualised return of over 60%. To date, Future Forex has processed over R7 billion worth of arbitrage trades.
The performance of Future Forex’s arbitrage product relative to more traditional investments is shown below:
Why would the collapse of FTX cause the arbitrage spreads to widen?
“The first thing to bear in mind is that our crypto arbitrage eliminates as many risks as possible, so regardless of what is happening to bitcoin, the rand or the dollar, all of our crypto arbitrage cycles are fully hedged.
“This means our clients never make a loss – and none of our clients have every made a loss,” says Scherzer.
“The collapse of FTX has amplified risk perceptions surrounding crypto, which has reflected in the widening arbitrage spreads. This has been further amplified by the recent strengthening in the rand.”
Has the collapse of FTX increased the risks of crypto arbitrage?
“No,” says Scherzer, “the only risk of crypto arbitrage remains the third-party risk. We had zero exposure to FTX and have done extensive due diligence on our third parties to ensure that we work with the most stable and trusted counterparties so that the risk of default is minimal. We hedge against any market risks – namely the fluctuations of the rand and bitcoin in the brief period of the arbitrage cycle. Without hedging, you are exposed to the possibility that either the rand or BTC can move against you, thus wiping out any expected profit.”
Future Forex is able to arbitrage using BTC and the USDC stablecoin, which is a crypto version of the US dollar. Scherzer says the benefit of switching between USDC and BTC is that clients can maximise overall profits by taking advantage of the best spread on any given day.
“We have seen times when it is more profitable to arbitrage with BTC, and other times when USDC is more profitable. We’re able to switch between the two to maximise returns for clients.”
Starting capital required
A minimum of R200 000 is required to start with Future Forex, and is held in the client’s own bank account after each cycle. A realistic net profit target of 1% to 1.5% per trade is still achievable, says Scherzer. This means clients could make up to R165 000 a year should spreads remain at this level or even slightly below.
Future Forex does not charge any management fees, but rather shares in the profits earned. There are no hidden fees or costs and all returns stated above are already net of any fees. This profit-sharing model ensures that clients’ interests are aligned with those of the company.
You can register here.
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