The mechanics of crypto arbitrage

You’re effectively buying cryptocurrency abroad and selling them for a higher price in SA.
Though it is possible to arbitrage bitcoin, Ovex has settled on True USD, a cryptocurrency that can be traded 24/7. Image: Chris Ratcliffe, Bloomberg

The largest part of Ovex’s business is crypto arbitrage, which involves the buying of something cheaper on one market and selling it for a higher price on another.

Arbitrage is an ancient practice that predates organised financial markets by thousands of years. For example, buying bananas in the Eastern Cape for R1 000 a ton and selling them in Cape Town for R1 100.

But in this case, Ovex has spotted an almost risk-free opportunity to purchase a cryptocurrency called True USD – which is fully backed by US dollars – and sell it on the same day in SA for a higher price.

Over the past two months that arbitrage profit has ranged between 3% and 5%, though it has sometimes been higher, sometimes lower.

A common question from people unaccustomed to this market is ‘How is it possible that True USD generally trades at 3-5% higher than in the US market?’.

Jon Ovadia, founder and CEO of Ovex, explains: “Most countries that have capital controls, which means you have restrictions on the amount of foreign currency you can purchase, will have an arbitrage opportunity. You find the same thing with bitcoin. You can buy bitcoin cheaper on overseas exchanges than you can in SA, so many thousands of South Africans have managed to profit from this by buying bitcoin abroad and selling it locally on the same day for a profit.”

Though it is possible to arbitrage bitcoin, Ovex has settled on True USD, which is a cryptocurrency that can be traded 24/7 (unlike regular US dollars, which are generally traded during banking hours).

How it works

You open an account at Ovex and undergo the normal Know Your Customer (KYC) steps:

  1. Upload a copy of your ID to the Ovex website
  2. Upload proof of address
  3. Provide proof of funds (a Reserve Bank requirement). This means the money you are using for arbitrage trading is your own and not someone else’s (though funds borrowed from a registered financial institution are accepted).

Once your Ovex account is open, you will be required to link it to a bank account in your own name. Then you fund your account (it is better to have a bank account used exclusively for arbitrage, and Ovex will help you open one). Then you are ready to fund your bank account and commence arbitrage trading.

You will be allocated a dedicated WhatsApp group chat for communications with Ovex’s trading desk.

There are two ways to arbitrage: one is where you retain control and instruct Ovex when to execute a trade; the other is where you request Ovex to conduct arbitrage on your behalf automatically.

Using your foreign exchange allowances

All South Africans are entitled to a R1 million discretionary allowance per year, with which they can buy forex for investment (or any other legitimate purpose).

In addition to that, those with tax clearance from the South African Revenue Service (Sars) can apply for a R10 million a year foreign investment allowance.

That’s a total of R11 million. Assuming a 5% arbitrage profit on R11 million, that’s a potential profit of R550 000. If you’re married, your spouse could claim a similar amount, making a total of R22 million available each year for arbitrage.

Applying for the foreign investment allowance

To qualify for the R10 million a year foreign investment allowance, you have to be a taxpayer in good standing and over 18 years of age. You can get more information from Sars here.

You can apply for this yourself, or get your accountant to do it for you. Ovex will also assist with the application process.

Buying True USD

You can do arbitrage manually through Ovex, or request them to do it automatically. If you do it manually, send a request to Ovex via WhatsApp to determine what the arbitrage premium is on any particular day. Some days it may be low, and you may choose to wait for a more profitable day. Bear in mind that you will be required to confirm arbitrage trades via WhatsApp so that Ovex has a clear audit trail, so that you cannot later claim you never instructed to company to trade on your behalf.

If you request Ovex to conduct arbitrage automatically on your behalf, you will pay a slightly higher fee.

Once the instruction to trade is given by the client, the US dollars purchased are shipped overseas by Ovex to Trust Token, a San Francisco-based ‘stable coin’ platform with a market cap of nearly $500 million. The US dollars are used to purchase Trust USD and then immediately shipped back to the Ovex exchange in SA and sold.

The beauty of doing this is that your profit is locked in from the moment you give instructions to Ovex to trade on your behalf. Your Trust USD are then sold and your Ovex account is credited with rands. You can monitor your account at any time of day or night.

Fees and risks

For the arbitrage service, the all-in fee is a flat 1%, which includes the costs of exporting forex.

Ovex also has an Over-The-Counter (OTC) desk where large buyers of crypto can get fast execution at good prices (not all exchanges have the liquidity to fulfil large orders at speed). The fees for OTC trades are 0.25% for trading plus 0.1% if you want to settle those trades in 24 hours.

The only risks that exist from arbitrager are counterparty and systemic risks, such as Trust Token or one of its banking partners failing – which is a remote risk. Ovex is also in the process of acquiring a forex financial service provider, so that it can exercise more control over the entire arbitrage service.

Starting capital

Ideally you should start with R100 000 or more. The minimum is R50 000.

Rinse and repeat.

Once Ovex has completed one arbitrage trade on your behalf, you simply repeat the process until such time as you have burned through your R11 million annual forex allowance.

Brought to you by Ovex.

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COMMENTS   5

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Privelegas:

”The most delicious of all priveliges – spending other people’s money”

John Randolph (1773-1833)

What is your FSP number please?

“The US dollars are used to purchase Trust USD and then immediately shipped back to the Ovex exchange in SA and sold.”

How are they sold? On which platform or exchange? And what demand is there locally to purchase Trust USD?

On the Ovex exchange, which anyone could view (including the author of this sponsored article) there is almost no trading history of Trust USD for the months of October or November.

That is a direct ”contravention” of exchange control – these people should be a registered service provider, with exchange control approval, if they want to do that.

They are also contravening the FAIS Act, by not answering my question with regards to their license

They make use of two intermediaries: Sasfin (FSP 23833) and Marshall Consulting (FSP 49034). Marshall Consulting acts as your agent.

rudyard 3 hours ago

”They make use of two intermediaries: Sasfin (FSP 23833) and Marshall Consulting (FSP 49034). Marshall Consulting acts as your agent”

Which begs the question: Has Sasfin got Exchange Control Approval to trade buy and sell FX on behalf of Ovex? As far as I know trading the Tokens is not permitted (yes).
I would like to see their Exchange Control Application Number!

End of comments.

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