From R200K to a profit of R100k over two to three months?

CIARAN RYAN: Thousands of people have woken up to the benefits of crypto arbitrage. That’s where you can buy crypto overseas and sell it in South Africa for a higher price. The crypto premium typically ranges from 1% to 1.5% net of costs, which still makes it extremely profitable, provided you can hedge out the currency and crypto risks – which is exactly what Currency Hub does.

South Africans in good standing with the South African Revenue Service can access R11 million a year for crypto arbitrage through their [single] discretionary allowance of R1 million and the foreign investment allowance of R10 million. So this makes it relatively low risk and quite attractive if you can make a profit of 1% to 1.5% on that.

Well, joining us to discuss this is David Farelo, who is co-founder at Currency Hub. Hi David, thanks for your time and welcome back. Give us a sense of the current state of the crypto arbitrage market and what kind of premium investors are earning at the moment.

DAVID FARELO: Hi Ciaran. Thanks again for having us back here. So yes, the crypto market is still very much a macro-driven speculative asset. So when global assets sell off, cryptocurrencies will do the same. Over the past six months we’ve seen a continued deterioration in the global macro environment, and that’s due to a number of things, like rising inflation globally to levels we haven’t seen in some countries for over 40 years. The central banks have been increasing interest rates, putting further pressures on the consumer and, as a result, equities, treasuries and cryptocurrencies have all fallen into a bear market.

With that being said, signs of a bottom are there but not yet confirmed. So I do believe that the worst may be behind us. But the recovery in my view won’t be a fast one. The South African crypto premium has suffered as a result of this.

Now the US dollar/rand depreciated close to 12% from June to July. That’s come back a bit in August, but we’ve seen over the past few days it going right back to its peak in July which, together with poor levels of liquidity and selling pressure in cryptocurrencies, puts a strain on the premium during this time to levels of between 0.5% and 1% gross.

Now, towards the end of July we saw an increase in appetite for risk, together with a strengthening rand, which actually helped the premium back to a more desirable level of between 1.4% and call it 1.7% growth. That’s where we are currently trading at today.

CIARAN RYAN: If we go back to 2017, the crypto arbitrage premium was phenomenal. I mean, it was about 4%, and even at times 25%. In other words, you were buying crypto like Bitcoin on an overseas exchange, selling it in South Africa for anything between a 4% and 25% higher price. Now, you’ve mentioned, it’s down to about between 1.4% and 1.7%, that premium. Why has it been drilled so much over the last few years? Why is it so down?

DAVID FARELO: Yes. So 2017 is when we saw an influx of buyers in cryptocurrencies, mostly retail buyers, which saw the Bitcoin price rise from $1 000 to $20 000 at its peak. This came with a large amount of volatility and, because the cryptocurrency market back then was a lot less mature with limited sources of liquidity, this would move the premium around from 0.24% to 4% to as much as 25%, 30% on some days.

Now these kinds of arbitrage returns attracted a lot of attention and so more and South Africans [began] to trade the crypto arbitrage. It became more familiar, it became more credible, safer. And now, fast forward five years – which takes us to today – there are thousands more people who are trading the crypto arbitrage, companies like Currency Hub.

Now a reminder of how the arbitrage trade works. In simplicity, we buy cryptocurrency offshore, let’s call it in America, for example, and bring the cryptocurrency back to South Africa where we sell it for rands. We are always selling the crypto in South Africa, which means we need buyers to buy the crypto from us locally. Currently demand for crypto is low due to the current macro environment, and the amount of people trading the arbitrage is constantly increasing. So this puts downward pressure on the premium.

CIARAN RYAN: Okay. So talk about your clients, Currency Hub’s clients, and how they’ve been doing during the recent market volatility. I think people think about crypto and they see what’s happened to Bitcoin. It dropped 60% from its peak to its trough. Of course it has recovered a bit since then, but how have your clients done?

DAVID FARELO: To date our clients have always profited from our arbitrage service, and will continue to. We are a discretionary arbitrage service, meaning that we have a mandate with our clients which allows us to decide on when to trade for them. So when the premium is lower than its short-term mean and we can see that certain macro factors are causing this, we will actually wait for these factors to turn, which should result in a premium rising back to a more desirable level to trade.

We demonstrated this in June/July when we halted trading for a period of time because of the rise in downside volatility, which squeezed the premium to levels of between 0.5% to 1% gross for most of July. The macro conditions since then have actually bottomed out and we [began] trading again in the last week of July and have been trading every day since.

CIARAN RYAN: Okay. And what does Currency Hub do differently from other providers in the space, to ensure that you get consistent returns in an environment where the premium is not as high as it was a few years ago?

DAVID FARELO: There are two elements in our arbitrage business, which ensures we provide the best service to our clients.

The first [is that] we are a forex intermediary provider, so we facilitate all our clients’ forex payments to buy the cryptocurrency offshore in house. This means you’re not paying a third-party forex provider to do this for you.

The second one is that we hedge our clients’ trades.

Now, hedging in our service offering means that we buy and sell the cryptocurrency simultaneously, which guarantees the profit for our clients.

In the low-premium environment, which is where we are currently, if you are not hedged when doing arbitrage, then a volatile market will most certainly result in some losing trades.

Now our arbitrage service is fully hedged. So we will never incur a loss when trading the arbitrage for our clients. And lastly, Currency Hub does not charge our clients for the arbitrage service. We take our fee on the forex service only.

CIARAN RYAN: So you’re only charging on the forex leg of the transaction; you’re not participating in the profits or charging any fee over and above that?

DAVID FARELO: That’s correct.

CIARAN RYAN: Okay. Talk about the future for crypto arbitrage. [There has been] a lot of speculation over the years that this is a very temporary phenomenon, [and] may not be around forever. Also talk [to us] about the crypto markets as a whole, and should everybody be doing arbitrage? Is this something for everybody or not for everybody?

DAVID FARELO: The crypto arbitrage opportunity in South Africa still exists because of exchange-control laws, which are even more stringent for funds leaving South Africa to buy cryptocurrencies.

What I mean by that is that companies in South Africa are not being allowed to buy cryptocurrencies abroad, and so the only way you can do this is through your personal foreign investment allowance, which we know is R10 million per calendar year. So the exchange-control law helps put a cap on the amount of arbitrage that each person in South Africa can do in a year, [and] thus alleviates some of the selling pressures I spoke of earlier, which helps keeps the premium higher.

Until we see cryptocurrencies regulated or if the Reserve Bank allows companies to purchase crypto offshore, I believe we’ll still see the premium continue to trade between 1.25% and 2.5% going forward.

So I would encourage South Africans with at least R200 000 in capital to sign up with us. With a minimum of R200 000 in the trade our clients are currently making around R100 000 net profit with these current premium levels over a two- to three-month period. So, in my view, this makes the crypto arbitrage opportunity one of the best, if not the best, risk-return investment profile in our country at this point in time.

CIARAN RYAN: Just to be clear, that starting capital of R200 000 – you mentioned a profit of R100 000 over two to three months. That’s presuming that you’ve exhausted your full capacity of R11 million that you have from the Reserve Bank to trade for crypto arbitrage. Correct?

DAVID FARELO: Exactly. So you’re trading with R200 000 and we are exhausting the full R11 million, and on that we make about R100 000 for our clients.

CIARAN RYAN: David, where can people find out more about this?

DAVID FARELO: You can go to our website on www.currencyhub.co.za, and you can reach out to us. We’ll have an account manager that will contact you, or you can actually register right on our website and we’ll take it from there.

CIARAN RYAN: Wonderful stuff. Thank you very much. David Farelo is co-founder of Currency Hub. Thanks for joining us, David.

DAVID FARELO: Great, thanks. It was great being here, Ciaran.

Brought to you by Currency Hub.

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