Crypto arbitrage shrugs off the crypto plunge

The last few months have been terrible for cryptos, with Bitcoin (BTC) down 60% from its November 2021 peak above $67 000.

It’s been even more horrendous for altcoins such as Ethereum (ETH), down almost 70% over the same period.

It’s a story repeated across the crypto boards, made worse by the collapse of the Terra/Luna ecosystem, which wiped out roughly $40 billion in value.

One corner of the crypto space that has continued to shine through all this turmoil is crypto arbitrage, which has lived up to its reputation as a relative safe haven in times of trouble.

Crypto arbitrage involves the buying of cryptos such as BTC on overseas exchanges and selling them in SA at a higher price – usually 2% to 3% above what they sell for abroad.

“Arbitrage is a relatively safe way for people to profit off the crypto space, without being exposed to the massive volatility we have seen in the last few months,” says Harry Scherzer, qualified actuary and CEO of specialist crypto arbitrage provider Future Forex, an authorised FSP for currency remittance services.

The following chart illustrates how the arbitrage market has compared to traditional investments as well as to direct investment in Bitcoin over the past 18 months. The blue line shows the returns from Future Forex’s crypto arbitrage, which has delivered consistent and relatively low-risk returns for clients.

Source: Future Forex

“Crypto arbitrage has historically delivered a net profit of 1% to 2% per trade, regardless of whether crypto prices are high or low,” says Scherzer.

That’s reflected in the chart below, showing the net (yellow line) and gross profit (blue line) from crypto arbitrage over the last two years. The profit margin has declined from between 3% and 4% to an average of 1% to 2% per trade over the last two years, but is still highly attractive for those keen to profit from cryptos in a way that does not expose them to market risk.

Source: Future Forex

Future Forex is able to arbitrage using BTC and the USDC stablecoin, which is a crypto version of the US dollar. Scherzer says the benefit of being able to switch between USDC and BTC is the ability to maximise profits.

“There are periods when the profit margin on USDC is higher, and there are periods when BTC is more profitable, so we are able to switch between the two to maximise returns for clients.”

Hedging out the risks

Future Forex has managed to hedge out two of the key risks in crypto arbitrage – market risk (being exposed to BTC when the price is volatile), and exchange rate risk. Arbitrage involves the purchase of US dollars which must be shipped abroad to purchase cryptos, and that exposes the trader to exchange rate movements. These market movements can often eliminate or reduce the profit on an arbitrage trade.

By executing trades immediately, Future Forex is able to hedge these risks out, locking in profits at the initiation of the trade, rather than at the completion. Clients trading through Future Forex are therefore not exposed to any market risks and have predictability of returns at the outset of each trade.

A realistic expectation is a net profit of 1% to 1.5% per trade, which can accumulate to over 100% per annum, depending on the number of trades performed over the year, says Scherzer. Future Forex boasts an average annualised return in excess of 80% per annum for its clients. It has processed over R3.3 billion worth of trades since inception.

Arbitraging using foreign currency allowances

Crypto arbitrage utilises the two foreign currency allowances available to South Africans – the R1 million-a-year single discretionary allowance (SDA) and R10 million-a-year foreign investment allowance (FIA). That’s R11 million a year – and double that (R22 million) for a married couple – available for crypto arbitrage. Future Forex is also able to assist clients in applying for the FIA free of charge, which is available to those who have tax clearance from the SA Revenue Service.

The minimum required to trade is R100 000, though Scherzer says trading with R200 000 or more is preferable due to economies of scale, meaning the percentage profits will be significantly higher the larger the capital for trading.

With R200 000 starting capital, R11 million in foreign currency allowances for arbitrage, and a realistic profit target of 1% to 1.5% per trade, clients can expect to make R110 000 to R165 000 a year.

The process is fully automated once clients are on-boarded. Future Forex allows clients to nominate their desired profit target, though this must be within reasonable limits. “There are days when the price differential might be as high as 4%, but this is not something that will happen often, so we advise clients that they should be realistic in their profit expectations,” says Scherzer.

Costs

Future Forex does not charge any management fees and rather shares in the profits earned. There are no hidden fees or costs. This profit-sharing model means clients’ interests are aligned with those of the company. You can register here.

Harry Scherzer of Future Forex will be speaking at the Better Investor Conference next week. You can catch him on Day 1 in Session 7 at 13h30, moderated by Ciaran Ryan. You can register for the conference for free here. 

Brought to you by Future Forex.

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