Why you can never write off crypto arbitrage

2022 started off with a bang for crypto arbitrage provider Future Forex. Here’s why.
Image: Moe Zoyari/Bloomberg

With the exit of OVEX and VALR form the crypto arbitrage market, you could be forgiven for thinking the market is dead.

Nothing is further from the truth, says Harry Scherzer, a qualified actuary and co-founder of Future Forex.

“With our clients netting an average return of 1.25% per trade in January, we’re seeing more interest from the public, not less. For a lot of people unfamiliar with cryptos, this is a relatively low risk way to enter the market. There are some risks, but we’ve done everything possible to eliminate and mitigate as many of these possible.”

Arbitrage involves buying an asset cheaply on one market and selling it for a profit on another. This can be done with bitcoin or any number of cryptos, such as USDC, a stablecoin backed 1:1 by the US dollar. These cryptos typically sell on SA exchanges for a higher price than they cost overseas due to exchange controls in SA.

The following chart shows what has happened to the crypto arbitrage spread over time. The net profit to Future Forex clients (after costs) in the yellow line has dropped from 2-3% per trade in late 2020 to 1-1.5% per trade in early 2022 (with a trade typically taking 1-2 days).

Source: Future Forex

One of the attractions of dealing through Future Forex is a fully automated arbitrage system that allows it to capitalise on the momentary spikes in the spread shown above – as often happens throughout the year.

“It is typical for the arbitrage spread to shrink and widen intermittently over the course of each day, usually due to sudden spikes and dips in the rand-dollar exchange rate.

“On the occasions that the spread widens, we are able to grab that profit, fully hedged for any forex or crypto price risk, and bank it for our clients,” says Scherzer.

“This functionality is exclusive to Future Forex and only made possible by our strong internal systems. Not only that, we can book multiple trades per client at that momentary widening of the spread.”

South Africans with tax clearance from the South African Revenue Service (Sars) have R11 million a year at their disposal for crypto arbitrage. This is broken down into a Single Discretionary Allowance (SDA) of R1 million and a Foreign Investment Allowance (FIA) of R10 million a year. The minimum required by Future Forex is R100 000. A net 1.5% a year on R11 million is R165 000 per year in potential profits.

For a married couple, that R11 million becomes R22 million, and a potential profit of R250 000 or more a year.

Based on the current arbitrage spread, Scherzer says most Future Forex clients are achieving a net profit target of 1-1.5% per trade, translating to an average annualised return of around 70% for clients.

Market participants have worried for years that the crypto arbitrage market would disappear altogether as more people get involved. Arbitrage opportunities exist wherever the same asset is traded in different markets at different prices. The more traders spot these opportunities, the quicker these price differences disappear.

Scherzer argues that the crypto arbitrage spread has narrowed over the years, but is unlikely ever to completely disappear.

“There will always be shocks and misalignments between markets that will cause arbitrage spreads to widen. Our strong back-end tracking system puts us in a position to capitalise on those momentary opportunities for our clients, even if they exist for just a few minutes.”

DIY arbitrage involves buying forex, shipping it to an exchange overseas (which can take several hours), buying crypto on the overseas exchange and then shipping it back for sale (hopefully) at a profit on a South African exchange.

There’s plenty that can go wrong in this process: the rand exchange rate or the crypto price can move against the client while the trade is in play, reducing or wiping out any expected profit.

Future Forex – which was recently awarded a financial services provider licence by the Financial Sector Conduct Authority for currency remittance services – maintains a fully hedged book which means clients are not exposed to these market risks.

There is still third party risk (the chance of an exchange going bust or suffering a hack while a trade is in progress) though only the most secure exchanges are chosen as partners following extensive due diligence, says Scherzer.

Costs

Future Forex shares in the profits on a sliding scale depending on the investment amount. There are no other hidden fees or costs. This profit sharing model means clients’ interests are aligned with those of the company.

The market demographics

Josh Kotlowitz, co-founder and CTO of Future Forex, says that while the company has both male and female clients of all ages, the most common crypto arbitrage client is male, aged 40+, of high net worth and in search of savvy ways to invest their money.

Is the crypto arbitrage market overtraded?

Not by a long shot, says Kotlowitz.

“We’re still waiting for the penny to drop with average South Africans, given the very contained risks of crypto arbitrage.

“To date we’ve processed over R1.5 billion worth of trades and our growth, client-wise, has been tremendous. More people are talking about it, and recently our month-on-month growth has been up to 30%, and I don’t believe we’re anywhere near saturating the market.”

Benefits of dealing through Future Forex

”Our fees are low, and we only make profits when our clients do, and that is the best guarantee that we are going to make profits for you”, says Scherzer.

“We can trade at any time during the day, so when exceptional profit opportunities present themselves, we can take advantage of that. We also handle all FIA applications with Sars at no cost to the client. Each client also receives a dedicated relationship manager to walk them through the process, safely on-board them and provide a constant point of contact for any queries thereafter. Once clients are on board, the system is automatic and relatively hands-off.”

Clients are also able to nominate their minimum targeted arbitrage profit level per trade, whereby their funds will only be traded if this return is matched or exceeded. Future Forex’s relationship managers assist clients in setting an appropriate minimum targeted return to maximise profits over the year. If the client wants a net 4% per trade minimum, that trade may only come around two or three times a year. A more realistic target would be 1.25% or better.

“Ninety percent of our clients leave it up to us to set their minimum targeted return to a level which maximises their return over the year,” says Scherzer.

Will regulations kill the crypto arbitrage market?

Crypto regulations are on their way, and rather than driving the crypto arbitrage market out of existence, will make it harder for scammers to operate as only legitimate operators will be licenced. That may attract larger volumes of money to crypto arbitrage, particularly from institutions, but experience elsewhere in the world suggests the crypto spread may go to zero for longer periods of time, but will always reappear as risks in different parts of the world reflect in price differences between different markets.

What cryptos does Future Forex trade?

USDC, but other cryptos will soon be added to the trading list to provide more profit opportunities.

Brought to you by Future Forex.

Moneyweb does not endorse any product or service being advertised in sponsored articles on our platform.

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