The whole idea of crypto arbitrage is to exploit price differences that frequently occur in the same asset on different markets.
By way of example, on Tuesday bitcoin could be bought on overseas exchanges for roughly 3.4% less than local exchanges. You could purchase bitcoin on an overseas exchange using your foreign exchange allowances, and then sell it within an hour or so on a SA crypto exchange to lock in the profit.
There are several risks you run along the way:
- Prices tank while your bitcoin is en route to SA, wiping out your expected profit;
- There are delays in shipping your bitcoin from overseas to the local exchange (increased exposure to the market increases the risk of a loss)
- Either the overseas or local exchange fails, is hacked, or goes bust (what happened at the failed iCE3 exchange is an example)
- The exchange owner ducks with your crypto (as reportedly happened with the Turkish exchange Thodex)
- Your bitcoin is shipped to the wrong address and is lost forever.
These are some of the most obvious risks.
The key risk that arbitrage traders seek to overcome is prolonged exposure to volatile market prices. The quicker you are in and out of the market, the less market risk you face. Crypto prices can move up or down 2-3% in an hour, and a price move in the wrong direction can eliminate your arbitrage profit. One way to manage this risk is to have capital on both the overseas and local markets, and simultaneously buy on the cheaper market and sell on the more expensive one, though this is not a practical option for most people.
Ovex founder and CEO Jon Ovadia says the company was founded to eliminate as many of these risks as possible: “Arbitrage is all about trying to manage and reduce risks as much as possible, and one of the biggest risks is market exposure. We arbitrage using True USD (TUSD) which is a stablecoin backed 1:1 by the US dollar, and is issued by Trust Token, a highly reputable stablecoin issuer based out of San Francisco. The arbitrage gap between TUSD and bitcoin tends to be rather similar, but there are certain efficiencies we can achieve with TUSD in terms of speed of execution that is more difficult with bitcoin.”
Ovadia points out that Ovex clients are able to lock in an arbitrage profit without exposing the client to market risk. This is achieved by extending a line of credit to the client to compensate for any market price moves while the arbitrage trade is underway.
“Exchange risk” is another risk that anyone contemplating getting into cryptos needs to consider – the risk of the exchange failing or going bust, as happened with iCE3. This requires taking a view of the financial and operational robustness of the exchange. Ovadia points to Ovex’s deep liquidity. Another way to reduce exchange risk is to transfer arbitrage profits as soon as possible into your bank account. Ideally, you are never exposed to either the market or the exchange risk for more than a few hours, or at worst a day.
The other risks associated with crypto arbitrage are primarily related to the potential for error: sending crypto to the wrong address, the wrong market, or buying the wrong asset. Ovex takes care of the logistics of shipping funds abroad and purchasing TUSD at the correct price.
“There are complexities in doing arbitrage and there are many moving parts involved,” says Ovadia. “We take care of these logistics to try and eliminate as many risks from the arbitrage trade as possible. Our service is aimed at those who want to participate in the crypto space in a manner that is relatively low risk, where we have done everything possible to manage and contain the key risks.”
Ovadia says Ovex has paid out more than R40 million in arbitrage profits to clients since 2017.
Crypto arbitrage opportunities wax and wane and sometimes disappear altogether. As more people participate in this space, the arbitrage gap between local and overseas exchanges has become smaller, but is unlikely to disappear altogether, says Ovadia. It’s a function of supply and demand, where foreign exchange is in relatively short supply. Countries like SA with exchange controls typically pay a premium for “hard currency” assets like bitcoin.
Brought to you by Ovex.
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