Crypto arbitrage explained simply – Moneyweb

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Tens of thousands of South Africans have learned about crypto arbitrage in recent years, but for many more people it remains a mystery.

This Q&A with Coindirect’s Chris Harmse answers key questions surrounding crypto arbitrage.

What do we mean by arbitration?

It is the simultaneous buying and selling of the same asset in different markets. For example, bitcoin can be traded at R500,000 abroad and R520,000 in South Africa. You can grab that R20,000 profit by buying bitcoin from the cheapest UK market and shipping it to South Africa (which takes around 45-60 minutes) and selling it for the higher price. .

This R20000 profit is equivalent to a 4% profit on the total bitcoin price of R500000. You do not need R500000 to participate in crypto arbitrage, although the recommended minimum capital is R100000. Less than that, your profit is reduced by the costs involved.

What are the risks of arbitrage?

The whole idea of ​​arbitrage is to eliminate as much risk as possible. If you buy and hold bitcoin, it is risky. You are betting that the price of bitcoin will continue to appreciate, as history tells us that the price of bitcoin is extremely volatile, as we have seen over the past couple of months, given the decline. by almost 50% of the price during this period.

This is what we call market risk. In a traditional arbitrage situation, you would also have a currency risk: you have to buy forex and ship to our crypto wallet overseas, which may take a few hours, during which time the exchange rate may move in your area. disadvantage and reduce your expected profit. Then you would buy bitcoin overseas and send it back to SA, during which the price of bitcoin may move against you.

At Coindirect, we have access to forex and crypto liquidity through a combination of our own balance sheet and an extensive network of liquidity providers. This means that we can eliminate currency and market risks. When the arbitrage trade is executed, we immediately credit the client with the amount of forex they purchased. We also immediately buy bitcoin in the cheapest market (UK) and simultaneously sell it in South Africa to lock in profits.

The word arbitration itself comes from the same root as arbitrate, which means to give judgment. An arbitrage trade is an attempt to eliminate risk (or judgment). We buy bitcoin for a low price in one market and sell it for a higher price in another. The idea is to eliminate the risk as much as possible.

There are, of course, other risks, such as the risk that the exchanges leading the arbitrage trade will fail, which is why you should stick to well-capitalized and reputable platforms such as Coindirect.

The arbitrage premium between foreign and local exchanges was very low this month. To date, Coindirect has never seen a single transaction lose money.

So is Coindirects’ arbitrage business fully covered?

Yes, we cover the position of our clients using our own balance sheet. This is because what happens is that we credit the client’s account with the initial capital in rand plus the bitcoin with net profit in a matter of minutes rather than the hours it would take to do the arbitrage in the normal way. Your profit (plus your capital) on each transaction is visible in your account within minutes.

Is the crypto arbitrage market disappearing because too many people are taking advantage?

The growing number of participants in the crypto arbitrage market certainly explains the lower arbitrage premium, which is currently around 1% to 2%, but this is something we have seen before. At other times during this year we have seen the premium of 4-5%. The arbitrage premium may be low now, but it will widen again, as it has in the past.

What causes bitcoin to trade at different prices in different markets?

There is no centralized exchange for crypto assets. Each crypto exchange creates its own market, so the price of bitcoin may vary from exchange to exchange. There are people who are constantly monitoring these price differences and looking for opportunities to take advantage of them.

What determines the price of any asset is supply and demand. A surge in demand accompanied by a shortage of supply will cause the price to rise on one exchange, while on another the price remains relatively unchanged.

The arbitration market will never disappear completely. Any country with currency controls, like South Africa, is going to have a shortage of hard currencies like the US dollar. For the same reason, we pay a slightly higher price for internationally traded assets like bitcoin.

We have seen the arbitrage premium widen as the price of bitcoin has risen and thousands of new people enter the market. And we’ve seen the arbitrage premium drop to virtually zero or even negative (meaning it’s cheaper to buy bitcoin in South Africa than overseas). The more usual position is that it is cheaper to buy bitcoin abroad than in South Africa. As long as this situation continues, there will be arbitrage opportunities.

Are there other types of arbitration?

Yes. You benefit from arbitrage opportunities between different exchanges, even within SA. You get geographic arbitrage between different countries, which Coindirect does.

Can customers select the minimum profit range they want?

Yes, although sometimes choosing the highest level is not recommended if you are trying to maximize your offshore allocation or want to get your capital back faster. Obviously, the target profit range must be realistic. If you choose a net profit above 2%, you will likely go through times when no trades are executed. But if the customer wants a net profit of 1.5% after deducting all costs, we will only execute the transactions that will achieve this goal and it is a great convenience for the customers.

We currently offer three ranges of net profit targets:

1% to 1.5% (recommended) 5% to 2% (majority of clients) 2% + (slow execution).

What are the costs of Coindirect arbitration?

Customers need a minimum of R 100,000 to take advantage of the service, and Coindirect charges 1% of the principal on each arbitrage transaction. This does not include the R500 Swift plus 0.35% forex processing fee, which is a total of 1.85%.

Who is behind Coindirect and how strong is its balance sheet?

Coindirect was founded in South Africa, but has since moved its headquarters to London and now has offices in the UK, South Africa, New York and Hong Kong. Coindirect recently raised 1 million (R 17 million) in a seed funding round led by Concentric, with participation from Blockchain.com and MakerDAO backed by Andreessen Horowitz. However, it is able to offer significant liquidity through arrangements with external liquidity providers. This means that it can handle large volumes of transactions at any time.

To register for the Coindirects arbitration service, register here.

Presented by Coindirect.

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