How stablecoins help remove the risks in crypto trading

They are seen as a safe haven in a highly volatile asset class.
Stablecoins can be shipped instantly anywhere in the world at very low cost, unlike US dollars which can take up to two days to clear. Image: Chris Ratcliffe, Bloomberg

Stablecoins have become a huge part of crypto trading – it is reckoned that up to 60% of all bitcoin are purchased using Tether, a stablecoin backed 1:1 by the US dollar.

Traders use them to park profits in a stable asset linked to the US dollar, particularly after a run-up in crypto prices such as we have seen in recent months.

The largest stablecoin by market cap is Tether, worth about $38 billion, but there are others such as USD Coin (USDC) and True USD (TUSD).

These coins are not extensively used for trading between countries, but that day is likely close at hand.

Another reason for using stablecoins is that doing so allows for more efficient arbitrage in the crypto markets. Ovex, SA’s leading crypto arbitrage company, assists clients in seamlessly purchasing TUSD in the US and then selling them on the Ovex exchange at a 2% to 4% premium.

Ovex client experience

Ovex clients have recently been receiving an average net profit of 2.2% after costs are deducted through its arbitrage services, which means you could make 4% to 5% a week if you complete two arbitrage cycles during that period.

This is virtually risk-free, the only real risk being the remote chance that TUSD’s issuer, Trust Token of San Francisco, goes bankrupt in the middle of an arbitrage transaction.

That risk is further reduced because Ovex is able to extend a line of credit to clients and lock in profits at the start of each arbitrage transaction.

New-era arbitrage 

“Arbitrage has always been a part of financial markets,” says Ovex founder and CEO Jon Ovadia. “In the past, people made profits from price differences in commodities, or stocks, that are traded in different exchanges.

“It is technically challenging to do this for the retail or even institutional investor, so our proposition was to make this accessible to a far broader market,” says Ovadia.

“We take care of the entire logistics of the arbitrage transaction.

“The reason we use TUSD, rather than say bitcoin, to arbitrage, is because we have found the arbitrage profit on stablecoins to be rather consistently better than in other assets. TUSD is a stablecoin linked to the US dollar that can be transferred from the US to SA virtually instantaneously.

“When doing arbitrage, you want to eliminate as much delay as possible, and using a stablecoin allows us to do this. We could not transact with the same speed if we were using regular US dollars or rands.”

Arbitrage gaps

All countries with exchange controls experience arbitrage gaps. A limited supply of hard currencies such as the US dollar in countries like SA means internationally traded assets such as TUSD or bitcoin generally sell for a higher price on local exchanges than they do overseas. It’s a function of scarcity.

South Africans participating in crypto arbitrage have to make use of their R1 million a year discretionary allowance and their R10 million a year foreign investment allowance. A net profit of 2.2% on this amount would yield roughly R240 000 a year.

A stablecoin is a crypto asset and can be shipped instantly anywhere in the world at very low costs – unlike US dollars which can take 24 to 48 hours to clear from one bank account to another. The costs of forex transfers can also be prohibitive, at 3% or more for smaller amounts.

Fiat currency limitations

This is the difference between fiat and stablecoins. Fiat is a currency like the US dollar or rand that is regulated and issued by a central bank. A stablecoin is largely unregulated and rides on the technology rails that power the crypto sphere, where transactions are virtually instant and there are no intermediaries and hence no broker fees such as you would typically pay to a bank.

While there have been legal challenges to establish whether Tether and its associated crypto exchange Bitfinex were being truthful about their claim that the stablecoin was backed 1:1 with the US dollar (it wasn’t), this case was recently settled with the New York attorney-general, and Tether will henceforth be required to provide detailed evidence of its financial backing, giving all holders of Tether peace of mind in the future.

The reason many investors purchase bitcoin with stablecoins like Tether is that some exchanges will only transact in ‘virtual currencies’, sometimes for convenience, and sometimes to avoid regulatory oversight. Holding stablecoins is a way to park crypto profits in a ‘safe harbour’ asset linked to US dollars without having to exit the crypto ecosphere.

Ovadia says Ovex is in the process of establishing a UK-based Over-The-Counter (OTC) desk, similar to its SA-based OTC desk, to handle large crypto transactions.

This will allow for a wider range of crypto arbitrage opportunities for clients in SA and abroad.

You can find out more and sign up here.

Brought to you by Ovex.

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