What was once little more than a cottage industry, crypto arbitrage has grown in sophistication over the years, thanks to corporate players such as Future Forex, an authorised Financial Services Provider (FSP 51884) for currency remittance services.
DIY crypto arbitrage – which involves buying cryptos abroad and selling them on SA exchanges at a profit – carries the risk of crypto prices moving in the wrong direction while the trade is underway.
However, Future Forex, having processed over R3.6 billion worth of trades, found a way to solve this problem by fully hedging all trades, so that profits could be locked in when the trade is initiated, rather than relying on the mercy of fickle markets.
“The objective we had when we started Future Forex was to eliminate as many risks as possible from crypto arbitrage trading and maximise returns for clients,” says Future Forex CEO and co-founder Harry Scherzer, an actuary with a background in financial markets.
“The two key risks in crypto arbitrage are market risk, which is the risk of being exposed to a cryptocurrency such as bitcoin [BTC] when the price is experiencing volatility, and exchange rate risk. To purchase cryptos abroad you need first to purchase US dollars, and the exchange rate can move against you while the trade is underway. Similarly, there may be some time between purchasing the crypto abroad and selling it locally, which typically exposes you to crypto fluctuations in that time. We’ve solved both these risks through hedging.”
“Our investment system is perfectly hedged, so there is no chance of market losses on any trade.”
Using third party providers, Future Forex is able to hedge these risks out, locking in profits at the initiation of the trade, rather than the completion. It makes use of multiple crypto providers, so it can shop around for the highest sell price in South Africa at any given time.
Running against the crypto trend
Despite the recent crash in crypto markets, crypto arbitrage has continued to provide healthy returns to clients.
A realistic expectation is a net profit of 1% to 1.5% per trade, which can accumulate to over 100% per annum, depending on the number of trades performed over the year.
“People have become accustomed to huge volatility in crypto prices, but that is not the case with crypto arbitrage,” says Scherzer. “Crypto arbitrage profits have been remarkably stable and consistent, and relatively unaffected by the volatility in crypto prices generally.”
Future Forex aims to provide the highest net profits to clients, after all fees, by reducing third party costs as far as possible, efficient and cost-effective hedging, and the ability to trade with multiple providers in both USDC (a US dollar-backed stablecoin) and BTC, depending on which offers the widest profit margin.
To date, Future Forex boasts an average annualised return of over 78% and, in the past three months, an average net return of 1.26% per trade, the highest in the industry to Future Forex’s knowledge.
Says Scherzer: “We have instant liquidity both abroad and in South Africa. We can therefore ensure that we trade at the optimal times throughout the day and catch the spikes in the spread.”
The arbitrage gap – the difference between local and overseas crypto prices – can spike as high as 8% on the rare occasion, and Future Forex is able to grab these market anomalies on behalf of clients.
Future Forex uses automated trading software, backed by an in-house trading team, to monitor the arbitrage ‘spread’ around the clock to ensure it does not miss these momentary market spikes.
Scherzer says the company has reduced its third-party costs to the lowest in the industry to maximise profits for clients.
“This is due to our economies of scale and strong relationships with our partners. This benefits Future Forex as well as its clients as we earn money through a profit share rather than any form of management fees, ensuring that Future Forex is perfectly aligned with its clients.”
Using foreign currency allowances to trade
Clients have access to two sources of foreign currency to participate in crypto arbitrage trading.
The first is the Single Discretionary Allowance (SDA) of R1 million a year, for which no permissions are required, and the Foreign Investment Allowance (FIA) of up to R10 million a year, available to those who have tax clearance from the South African Revenue Service (Sars). That’s R11 million a year – and double that (R22 million) for a married couple – available for crypto arbitrage.
“We perform the applications to Sars for FIAs free of charge, and our in-house tax team and partner tax practitioner ensure that these applications are approved as quickly as possible,” says Scherzer.
Future Forex does not charge any management fees, but 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.
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