Crypto arbitrage has become SA’s newest cottage industry

And Ovex has opened its services up to arbitrage competitors.
Image: Akos Stiller/Bloomberg

What was once an avocation for the technically initiated has gone mainstream.

No company has done more than Ovex to bring crypto arbitrage to the mass market. Early adopters of cryptocurrencies such as bitcoin noticed there were frequently large price differences between local and overseas exchanges. They capitalised on this by buying bitcoin at the cheaper rate overseas and shipping it for sale on the SA exchanges. That arbitrage gap typically ranges between 2% and 5% but has frequently jumped to 8% and even 15% ­– even in recent months. More usually, that gap ranges between 2% and 5% (though it can disappear altogether at times).

Arbitrage is an inevitable function of exchange controls: in all countries where there are restrictions on the export of currency, arbitrage opportunities arise.

Two kinds of arbitrage clients

Ovex offers broadly two kinds of arbitrage:

  1. Automated arbitrage for the retail investor, and
  2. Manual arbitrage through its over-the-counter (OTC) desk, which has become a favoured route for those offering arbitrage services to their clients.

Ovex CEO Jon Ovadia says the company’s OTC desk has several hundred clients who compete with Ovex in offering arbitrage services to clients.

“There are a few key advantages to using Ovex’s OTC desk,” he says. “We have several hundred clients using our OTC desk, which provides arbitrage services to others. They are able to trade on behalf of multiple clients at the click of a single button.

“The reason these arbitrage service providers prefer to use our OTC desk is that we can help them eliminate some of the risks by making use of our offshore exchange in the form of Ovex UK.”

Ovex allows users to lock in arbitrage profits at the start, rather than the end of the trade

In practical terms, this means Ovex is able to extend credit to arbitrage service providers to lock in profits so they are not exposed to the market for any length of time.

The principal idea behind arbitrage is that you are not exposed to market risks for any extended period.

You want to buy bitcoin abroad and ship to SA as quickly as possible, hopefully to sell on a local exchange at a higher price within an hour or two, before any dramatic shift in price that could wipe out the expected profit.

The advantages of using TUSD rather than bitcoin

Instead of using bitcoin, Ovex uses a stablecoin called True USD (TUSD) which is issued by Trust Token, a company based in San Francisco. The arbitrage gap in TUSD (between overseas and local exchanges) is virtually identical to that of bitcoin, but is has two key advantages over bitcoin: TUSD is backed 1:1 with the US dollar, so is not prone to wild price fluctuations, and it can be shipped anywhere in the world in minutes, rather than the hour or so it takes for bitcoin.

“This is a crucial advantage that we offer the local market,” says Ovadia. “The fact that you can lock in your arbitrage profit at the start of the trade, rather than the end, means you are able to eliminate any risk of foreign exchange price fluctuations.

“Anyone attempting to do crypto arbitrage on their own is exposed to foreign exchange risks as well as crypto market risks. Under a conventional arbitrage trade, you would buy US dollars at a certain rate and then ship those dollars abroad to an overseas exchange. That can take several hours, during which time you run the risk of the exchange rate going against you.

“With Ovex you don’t have that risk. You can buy US dollars from a local bank and we immediately credit you with that same amount of TUSD in our Ovex UK branch. Ovex South Africa is then able to convert that TUSD to rands – all within minutes so that your arbitrage trade is closed out and your profit is locked in.”

For this, Ovex charges a 1% spread. Clients are required to use their R1 million a year discretionary allowance and their R10 million a year foreign investment allowance (for which they need tax clearance).

“A lot of people are getting into arbitrage as a sideline business, where they run arbitrage trades for a number of different people. We are well set up for this and our systems make it possible for these service providers to handle 100 different clients with the same ease as one client,” says Ovadia.

Automated arbitrage for retail investors

Ovex offers a fully automated arbitrage service for retail investors, where trades are executed on an automated basis – with minimal risk. The company can offer this because of its ability to hedge foreign exchange and market risks.

Click here to sign up or find out more.

Brought to you by Ovex.

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