What is crypto arbitrage — and how does it compare with other investments?

Did you know that crypto currencies, such as bitcoin (BTC), trade at a 2%-3% premium locally compared to overseas?

This means that R100,000 worth of a crypto currency such as BTC bought on a US exchange will cost you between R102,000 and R103,000 to buy on SA exchanges. 

Savvy SA investors have been taking advantage of this discrepancy by buying crypto currencies on offshore exchanges, selling them for a higher price locally and pocketing the difference — this process is known as crypto arbitrage.

Why crypto arbitrage opportunities exist

These price differences (or arbitrage) exist because of SA's foreign exchange controls, which make global assets such as crypto currencies more expensive locally.

In terms of buying crypto currencies aboard, South Africans use their foreign exchange allowance, which entitles them to direct R11m a year to offshore investments. This total is made up of a R1m single discretionary allowance and a R10m foreign investment allowance.

Each time you invest in foreign assets, a portion of your foreign exchange allowance is used until you reach the R11m cap. The allowance is reset on January 1 each year.

Crypto arbitrage can help local investors take full advantage of this allowance — without needing to have access to R11m of assets.

As crypto arbitrage is cyclical process, a person with R200,000 can cycle it 55 times a year before they reach their R11m cap, for instance. 

It's important to note, however, that SA's foreign exchange controls also cap the profitability of crypto arbitrage to an estimated R100,000-R200,000 per person per year. Many investors use their own and their spouse's allowances to double their profits each year.

Is crypto arbitrage new?

Crypto arbitrage is a market that’s been around for many years, says Harry Scherzer, a qualified actuary and CEO of crypto arbitrage provider Future Forex (an authorised financial services provider for currency remittance services).

“While the profit potential in crypto arbitrage has been reduced over the years as more people participate in it, the price differential has been a rather consistent 2%-3% over the last year. Sometimes that gap shrinks or widens but it seems to have found an equilibrium at the 2%-3% mark. So I don’t see it disappearing any time soon.”

“Crypto arbitrage has shown itself to be completely uncorrelated with the returns of a direct investment in crypto currencies like BTC, or indeed the stock market, as returns solely depend on the price difference of crypto currencies in SA compared to abroad,” says Scherzer.

“Over a 24-month period, we have made some incredibly strong returns for our clients in a low-risk environment. Our average annualised return to clients exceeds 80% a year without much risk in the process.

“The way I see it, every South African is given an asset of having R11m to take out of the country. The vast majority allow this to expire worthless each year. Crypto arbitrage simply allows you to monetise this asset each year, while having access to only R100,000 or more.”

Scherzer explains that Future Forex requires R100,000 minimum investment from clients because of the fixed costs, mainly bank charges associated with sending funds abroad, that make smaller investment amounts less feasible. “But the more you put in, the lower these costs become, and the greater the percentage profit per trade,” he says.

How does crypto arbitrage outperform the market?

Relative to other investment options available to South Africans, such as an 8% interest savings account, investing on the JSE or S&P 500, or even buying volatile BTC, crypto arbitrage provides steady market-beating returns.

The graph below shows Future Forex’s crypto arbitrage returns since the first quarter of 2021, compared with other investment options.

With an initial client investment of R200,000 on January 1 2021, Future Forex outperforms these options, steadily growing to R550,110 at the start of June 2022. 

The same investment in the JSE would have ended up flat for the same period, while an investment in the next best alternative, the S&P 500, would have grown the starting capital to R232,934, falling far short of the profit achieved by Future Forex through the crypto arbitrage.

The steady increase of a crypto arbitrage investment compared with the volatility of more traditional investments points to its low-risk nature. 

What are the risks?

As with any investment, there are some risks with crypto arbitrage.

The chief one being that either the crypto price or the currency moves sharply while the trade is under way, which can take several hours. Say the price of BTC drops before you are able to sell in SA, effectively leaving you with no profit margin. Or if the US dollar-rand exchange rate dropped while in the middle of a trade, your BTC would be worth less in rand. 

Fortunately, these risks are taken care of by Future Forex, which hedges the currency and crypto exposure, so any profit opportunity is locked in at the start of the trade.

“A focal point for our team has been ensuring that the risk is minimised wherever possible. Our fully hedged system ensures that there are no market risks to investors as the profits are known at the outset of any trade,” says Scherzer.

This ensures that Future Forex's service is price agnostic, meaning that you will still make money regardless of whether BTC doubles or halves in price while trading. 

One remaining risk is counterparty risk. This is a remote possibility with Future Forex, says Scherzer, given the deep due diligence performed on all its overseas and local 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 counterparty failure is 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. Having performed this extensive due diligence has proved successful as we’ve never experienced a third-party failure in our tens of thousands of trades thus far.”

What is a realistic profit expectation?

The percentage gap between the buying and selling point typically fluctuates between 2%-3%.

A realistic expectation is a net profit of 1%-1.5% per trade, which can accumulate to more than 100% a year, depending on the number of trades performed over the year. 

What are the costs involved?

As mentioned, Future Forex requires a minimum investment of R100,000 from clients. 

Future Forex doesn’t take management fees. Rather, it takes a percentage of the profits earned during the arbitrage process. This profit-sharing model ensures clients’ interests are aligned with those of the company.

If you’d like to invest or find out more about the process, visit Futureforex.co.za

This article was paid for by Future Forex.