The downside of crypto arbitrage

It’s not a get-rich-quick scheme, profits are taxable, and there’s a limit to how much you can trade in a year.
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Crypto arbitrage may seem like easy money with little risk – you are buying cryptos cheaply overseas and selling them at a higher price in SA.

“Crypto arbitrage has become popular with people looking for relatively low-risk profits, but there are risks, and there are downsides to this type of trade,” says Coindirect head of trading, Chris Harmse. “The first thing people have to understand is this is not a get-rich-quick scheme. Yes, there are times when it is possible to make a 5% or even 8% profit on a single trade, but for the most part the arbitrage premium has narrowed to 1.5% to 3% and, as we saw in recent weeks, the premium disappeared altogether at times. This is to be expected as more people have entered the market, but we also know from history that the arbitrage premium returns to a more normal 1% to 3% over time. Make no mistake, this is still an attractive and profitable activity.”

Harmse says it is crucial for those venturing down the road of crypto arbitrage to understand some of the pitfalls and risks.

  1. There is a maximum you can trade per year, limited to your offshore forex and investment allowances. South Africans using their full foreign currency allowance would be able to cycle through R11 million a year, comprising the R1 million a year special discretionary allowance (SDA), which requires no approval from the SA Reserve Bank, and a further R10 million is available under the foreign investment allowance (FIA) for those who have tax clearance from the SA Revenue Service.
  2. The crypto space is unregulated. Though this is expected to change over the course of the year, currently there is no regulation to provide a baseline blanket of comfort to participants in this space. The reputable operators in this space will nevertheless require you to comply with Know Your Customer (KYC) and Anti-Money Laundering (AML) routines, similar to the banks.
  3. Sometimes the arbitrage premium is too low to trade (as we have seen in recent weeks). That premium can range from a positive 5% to 0% or even negative (which means it is cheaper to buy bitcoin in SA than it is overseas). This compares with an arbitrage premium of 5% to 8% frequently seen in 2017. The arbitrage premium narrows and widens with supply and demand but is likely to remain around as long as exchange controls remain in place.
  4. The crypto arbitrage market may not be around forever. Harmse says the crypto arbitrage space has become crowded, with several providers now offering this as a professional service. Once regulation comes to SA, this might open the floodgates to institutional flows, which could kill crypto arbitrage altogether. “We may be looking at a relatively limited window of opportunity for crypto arbitrage,” says Harmse. “It’s difficult to say if it will still be around in two years. So, our advice is to take advantage of the arbitrage premium while it is there.”
  5. This is not an opportunity for the mass market. Ideally, you need a minimum of R100 000 to participate in crypto arbitrage – below this, the fixed costs are too high to make this viable on a sustainable basis.
  6. Coindirect allows you to select your desired net profit target. This is a great benefit to clients, but the higher the selected profit target, the fewer the opportunities to trade. This is simply a function of the market. The recommended net profit target (after all costs) is 1.5% which allows for more frequent trading. Clients selecting 2% and above are limiting themselves to more rarefied trading conditions.
  7. Profits are taxable at the marginal rate. Profits from crypto arbitrage are treated as trading income and will be taxable at your marginal tax rate.
  8. Applying for the R10 million foreign investment allowance can be time consuming. Fortunately, Coindirect has specialists to assist in this process.

“Despite the downside, there are thousands of South Africans who have recognised the profit opportunities from crypto arbitrage,” says Harmse. “We’ve made this an attractive proposition by optimising our processes to complete two arbitrage trades in a day. This is one way to maximise profit returns on days when the arbitrage premium is wider than on others. The beauty of this trade is that you get to see your capital plus profits in your account on the same day – or even twice on the same day if two trades are completed.”


Clients need a minimum of R100 000 to take advantage of the service, and Coindirect charges 1% of the capital on each arbitrage trade. That does not include the R500 Swift fee plus 0.35% for forex handling, totaling 1.85%.

About Coindirect

In addition to its arbitrage service, it provides a platform for its 321 000 users to buy and sell more than 40 cryptocurrencies, and provides a cross-border payment service with same day settlement. It also operates an over-the-counter (OTC) desk for businesses and private clients to conduct large volume crypto transactions. Since its launch in 2017 Coindirect has moved more than €300 million (R5.1 billion).

To register for Coindirect’s arbitrage service, sign up here.

Brought to you by Coindirect.

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