Anyone involved in commercial trading understands arbitrage: for example, buying oranges in Limpopo and selling them in Johannesburg at a higher price.
The problem with this example is that you have to add the cost of shipping the oranges to Johannesburg.
Arbitrage is the exploitation of price differences in the same asset on different markets. Bitcoin typically trades on SA crypto exchanges at 3-5% higher (sometimes more, sometimes less) than overseas exchanges.
Sharp-eyed traders have exploited this price difference for years. Using their R1 million discretionary allowance, they would ship dollars or euros to an overseas crypto exchange like Kraken to purchase bitcoin and then sell the same bitcoin on a South African exchange for a higher price, netting a quick profit – which at times has been as high as 25%.
As more people have entered the crypto market, that arbitrage profit has narrowed to around 3-5%, though has been as high as 9% earlier this year. Sometimes the arbitrage gap disappears altogether.
Arbitraging cryptos requires jumping through a few hoops: such as purchasing foreign currency, safely shipping it abroad to purchase crypto assets and then safely shipping it back to SA.
Jon Ovadia, founder and CEO of Ovex, saw an opportunity to open this market to ordinary retail investors.
“People who are familiar with cryptos and financial markets understand arbitrage, but the concept is a bit foreign to most people, so we decided to launch a service where we would handle all the logistics to purchasing cryptos offshore and then returning them to SA for sale on the Ovex exchange.”
Ovadia answers some of the common questions surrounding arbitrage.
Is it legal?
Yes. As per the South African Reserve Bank website, South Africans are able to make use of their R1 million a year discretionary allowance and their R10 million foreign investment allowance for buying crypto offshore. Ovex takes care of the logistics of arbitrage.
Is it a scam?
No. It is completely legitimate. Remember, we are not trying to guess which direction the market is going to take, we are simply exploiting price differences that already exist in the market.
Is it risky? What are the chances of making a loss, or losing my investment altogether?
The risks are low because you are not betting on price moves. That is why arbitrage is popular among savvy investors. Arbitrage is an attempt to reduce or eliminate the risk of loss by buying something cheaper on one market and selling it for a higher price on another market almost simultaneously.
Ovex goes one step further, allowing clients to lock in profits once the instruction is given to execute an arbitrage trade. This is a major advantage over other types of arbitrage. For example, those arbitraging bitcoin (buying abroad and selling in SA) have often experienced steep drops in the bitcoin price over the few hours it takes for the bitcoin to land in SA. These drops are sometimes so dramatic that it can wipe out any arbitrage profit. Ovex eliminates that risk by allowing customers to lock in their profits regardless of how long it takes to ship money abroad, purchase crypto assets and then return them safely to SA.
What crypto does Ovex use to arbitrage?
Ovex uses True USD, which is a ‘stable coin’ fully backed by US dollars on a one-for-one basis. Because True USD is fully backed by US dollars, it is not prone to the wild price swings of speculative crypto assets like bitcoin. This is a key reason why Ovex is able to lock in arbitrage profits even before client funds are shipped abroad.
Is True USD a safe asset?
Yes it is. True USD is issued by TrustToken, a San Francisco-based stable coin platform with a market cap of nearly $500 million. It is safe because it is fully backed by the US dollar.
What have the arbitrage profits on True USD been in recent weeks?
Typically 3-5% but it has been as high as 9% earlier in the year. This gap changes constantly, but Ovex keeps clients up to date on any changes. Some days the gap may be smaller than this, which obviously means arbitraging may not be particularly profitable.
Why do I need to buy a crypto asset backed by the US dollar? Why not just buy US dollars?
The crypto market trades 24/7. The US dollar market does not (generally limited to banking hours). Trading in True USD can be done day and night.
Surely if everyone did arbitrage, the price gap between overseas and local markets would disappear?
It’s unlikely to disappear any time soon because all countries placing restrictions on the ability to purchase foreign currency can expect to pay a higher price for US dollar-priced assets such as bitcoin and True USD. So no, the gap will be around for a while, though it does fluctuate from day to day and week to week.
Is there a limit to how much I can arbitrage every year? I mean, this sounds so good that I would like to do it every day.
There is a limit to how much you can arbitrage, and that limit is your R1 million annual discretionary allowance and your R10 million foreign investment allowance, making a total of R11 million a year. You don’t have to have all of this money in your bank account to make it work. Many of our clients are starting arbitrage with R100 000 but the minimum is R50 000.
You need tax clearance from the SA Revenue Service (Sars) for the R10 million annual investment allowance (no such permission is needed for the R1 million discretionary allowance). If you’re married, your spouse may also be able to claim another R11 million for arbitrage purposes. That makes a total of R22 million a year. Assuming a 5% average profit on this amount of money, this gives an annual profit of R550 000 that is potentially available from arbitraging through Ovex.
Is Ovex regulated by the Financial Sector Conduct Authority (FSCA)?
No. Cryptos are not as yet regulated by the FSCA but regulations are coming and we welcome that because it will bring greater trust and legitimacy to the market and weed out the bad actors and scammers operating in this space. We do, however, require all new clients to undergo Know Your Customer and Anti-Money Laundering checks before we take them on board. We do this for our own safety and the safety of our clients.
Can I also purchase cryptos like bitcoin with you?
Yes, we have an Over-The-Counter (OTC) desk where we can fulfil large orders for bitcoin at very low cost, good prices, and lightning speed.
Do you give financial advice? I mean, would you recommend getting into cryptos?
We do not give advice. Buying cryptos such as bitcoin can be risky as we have seen in the last week when it dropped 13% in a very short space of time. For newcomers to crypto, arbitrage is, however, a safe point of entry because the risks are low.
Who are your financial backers?
Ovex is backed by crypto investment group Invictus, which ensures it has sufficient liquidity to operate and provide the level and speed of service we promise our clients.
Sign up with Ovex at www.ovex.io.
Brought to you by Ovex.