The holy grail of crypto arbitrage: completing two profitable trades per person a day

Coindirect has cracked it, and it’s a big deal.
Image: Chris Ratcliffe/Bloomberg

Crypto arbitrage veterans will remember the exhilarating days in 2017 when you could bank a 20% or even 30% profit in a day by buying bitcoin on an overseas exchange and selling it at a higher price in SA.

Imagine being able to do that twice in a single day. Of course, the arbitrage premium has narrowed significantly since then to around 2% to 5%, but there have been days when the profit potential rises to 6% or even 8%.

On days like that, arbitrage traders would love to cycle through as many trades as possible, booking profits of 6% to 8% each time.

That’s theoretically possible, but practically difficult because of the need to purchase forex for each trade and ship it abroad, which takes several hours. Most traders are happy to complete a single trade in a day.

Coindirect has cracked the holy grail of two arbitrage trades in a day, and it’s a big deal.

“The reason this is a big deal is that South Africans can only do so much crypto arbitrage in a year,” says Coindirect head of trading Chris Harmse. “That limitation is foreign exchange.”

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, which requires no approval from the SA Reserve Bank, and a further R10 million which is available under the foreign investment allowance (FIA) for those who have tax clearance from the SA Revenue Service.

A net profit of 4% on R11 million a year is R440 000, as opposed to the more usual profit of 1.5% – which amounts to R165 000 a year. The closer one gets to the 4% profit, the better.

Being able to complete two arbitrage trades in a day allows Coindirect to maximise profits on days when the arbitrage gap is high.

On days when the arbitrage premium is 4% or higher, clients are able to book two trades in a single day – and see evidence of the profits in their accounts within hours.

Optimising processes

How is this done?

“We had to focus on those things in the arbitrage trade that we can control. We optimised our operational procedures and removed time-consuming barriers, such as the buying and shipping of forex abroad. We line up the first trade of the day at 07:15 so by the time our forex broker gets in at around 09:00, we can execute the first trade. We purchase forex on behalf of the client and that forex lands overseas between 11:00 and 12:00,” says Harmse.

The profits from the first trade of the day will appear in the client’s Coindirect account at or before midday, allowing for a second bite of the apple in the afternoon, when the exact same procedure is followed. It may happen that the arbitrage premium has narrowed significantly or disappeared in the afternoon, in which case no trade will occur. Coindirect will wait for another day when the arbitrage premium widens.

Fully hedged trades

A key feature of the Coindirect arbitrage is that it is fully hedged – meaning the client is not exposed to any adverse movements in forex or bitcoin prices. “Using our own balance sheet and our access to liquidity providers, we are able to lock in arbitrage profits before the forex is shipped abroad,” says Harmse. This means the profit is locked in at 09:00, even before the client’s money arrives in Coindirect’s overseas account.

Clients can nominate their desired profit target

A unique aspect of Coindirect’s arbitrage offering allows clients to choose their minimum net profit range. For example, where clients select a target net profit of 2%, Coindirect will not execute a trade until the arbitrage gap is wide enough to cover its own costs and deliver a 2%-plus profit to the client per trade.

Harmse points out that completing two trades in a day will not always be possible due to circumstances beyond its control – such as the speed of the banks’ Swift system which can often be the cause of delays.

“There are some things we can control and some things we cannot. But completing two arbitrage trades in a day is our target, which can significantly improve clients’ total profit for the year,” says Harmse.

Costs

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, making a total of 1.85%.

About Coindirect

In addition to its arbitrage service, Coindirect provides a platform for its 321 000 users to buy and sell more than 40 cryptocurrencies, and offers 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.

Moneyweb does not endorse any product or service being advertised in sponsored articles on our platform.

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