This article was brought to you by Ovex.
Given the gains from cryptocurrencies such as bitcoin and Ethereum over the last year (900% to 1 400%), it shouldn’t surprise anyone that making 100% a year relatively risk-free is also possible in cryptos, says Jon Ovadia, founder of crypto company Ovex.
Welcome to the world of crypto arbitrage. Ovex was set up to make arbitrage more accessible to ordinary investors and to take out as many of the risks of trading as possible.
Tax-compliant South Africans are able to use their R11 million a year offshore allowances (R1 million discretionary allowance and R10 million a year foreign investment allowance) to generate a return of 2% to 4% a year in crypto arbitrage. You don’t need R11 million to participate. A good starting amount is R100 000, or even as low as R50 000, although returns will be lower.
The problem with bitcoin and other cryptos is their volatility. You can expect periodic drawdowns of 30% to 50%, which is enough to frighten off many investors unaccustomed to this kind of market whiplash.
Buy low, sell high principle
Arbitrage is the profiting from price differences in the same asset on different markets, for example, bitcoin.
You can buy bitcoin on overseas exchanges, ship it electronically to a South African exchange and sell it for a 2% to 4% profit.
Investors in countries with exchange controls – like SA – can expect to pay more for internationally-traded assets due to the restricted supply of hard currencies like the US dollar or euro. This is how arbitrage opportunities arise. Nigerians, in comparison, are paying a premium of up to 60% for their bitcoin due to the difficulty in accessing hard currencies.
There was a time in 2017 when the South African arbitrage gap (the difference in prices between overseas and local exchanges) for bitcoin went as high as 30%, but generally ranged between 5% to 15%. Making money with this kind of opportunity was like shooting fish in a barrel.
That gap has narrowed since then but is still a rather consistent 2% to 4%. The problem with this kind of arbitrage is that it is technically challenging for most people, as there are a number of moving parts that must be navigated: buying forex, shipping it abroad to an overseas exchange where you have an account, buying crypto on the foreign exchange, sending it back to SA (to the correct ‘address’) and then selling it on a local exchange for a profit.
Crypto company Ovex was established more than three years ago to simplify the process of crypto arbitrage.
Rather than buying bitcoin on an overseas exchange and sending it to SA, Ovex executes trades using a stablecoin called Trust USD (TUSD), which is backed 1:1 by the US dollar.
Effectively, you are buying US dollars abroad, shipping them to SA and selling them locally for a 2% to 4% profit.
Ovex handles all the logistics of arbitrage for its clients, but goes a few steps further to remove some of the risks that might wipe out any profits. For example, should the crypto price fall while en route from an overseas exchange to SA, your crypto profit can disappear or even go negative.
Instantaneous trades means there is no risk
Ovex eliminates this risk by using its financial resources to lock in arbitrage profits the moment the client gives the instruction to proceed with an arbitrage trade. This means there is no possibility of slippage due to time delays.
“We settled on TUSD rather than other cryptocurrencies for arbitrage purposes because it allows for a completely risk-free trade,” says Ovex founder and CEO, Jon Ovadia.
He explains: “When the client buys USD from their bank to send overseas they are able to – at the exact same time – sell TUSD for a profit via the Ovex OTC [Over-The-Counter] desk, which will extend the client a credit line.”
TUSD is issued by Trust Token, a San Francisco-based stablecoin platform with a market cap of nearly $350 million.
Ovex is backed by Invictus Capital, which manages about $150 million in crypto assets. Ovex recently closed a strategic investment round valuing the group at over R1 billion, according to Alameda Research, a Hong Kong-based firm managing over $3 billion and owning the fourth largest crypto derivatives exchange in the world, FTX.
Not a new concept
“We often get asked, is it really possible to make R200 000 a year doing crypto arbitrage?” says Ovadia.
“The reality is that arbitrage has been going on for centuries.
“If you bought oranges in Polokwane for R100 and sold them in Joburg for R120, that is a simple form of arbitrage.”
He adds: “What’s new about what we are doing is that we are using cryptos, and we are doing it with far greater speed and, I would say, at much less risk.
“Cryptos are notoriously volatile, and many people feel uncomfortable about the wild price swings in crypto assets – even though this has worked to their advantage over the last year. But there have been many years when crypto prices dropped dramatically. Bitcoin fell 84% after it peaked in December 2017.
“Crypto arbitrage is a much safer and less volatile way to participate in this market, and still make excellent returns.
Investment allowance applications at no charge
There’s another crucial benefit in doing arbitrage through Ovex: you need a tax clearance certificate from the SA Revenue Service (Sars) to access your R10 million a year foreign investment allowance (not your R1 million discretionary allowance), and that generally requires a tax practitioner or accountant to apply on your behalf. That can cost about R2 000, just for the application.
If you were arbitraging R10 million in one lot, this cost would not be prohibitive, but if you are reinvesting an amount of say R100 000 for each arbitrage cycle, an application would have to be made each time.
That would mean 50 applications at R2 000 a time, or R100 000 going to the accountant.
Ovex has engaged with a team of tax practitioners to do this on your behalf at no cost.
“Effectively, we cover the cost of the first application on your behalf, and we have put in place systems to automate all subsequent applications for foreign investment allowance,” says Ovadia.
“This means you pay nothing for applications to Sars – we cover all those costs.”
What the numbers say
Last month Ovex traded more than R4 billion on its OTC desk in South Africa, and is growing fast.
Making R200 000 a year or more from crypto arbitrage is being done regularly by hundreds of Ovex clients, says Ovadia.
“South Africans are realising the potential that exists in crypto arbitrage, and we have done everything possible to reduce or eliminate the risks and make it as accessible as possible.
“All our clients need to do is sign up and the rest is taken care of for them.
“If the client wants to be more actively involved – they can always use the Ovex OTC desk for their arbitrage, although the minimums [investments] are higher.”
You can sign up with Ovex or find out more here.