What is Arbitrage?
Arbitrage involves buying an asset cheaply on one market and selling it for a profit on another. Due to South Africa’s exchange controls, cryptocurrencies often sell for higher prices on local exchanges than overseas. This price disparity arises from the volatility of cryptocurrencies, supply and demand imbalances, and varying price discovery methods.
While arbitrage is generally a low-risk strategy, the profits often correspond to lower returns. Here are the pros and cons of crypto arbitrage.
Advantages
- Quick Returns: Traders can gain immediate returns by identifying price differences across exchanges.
- Beginner-Friendly: Certain arbitrage methods allow even beginners to start making a profit.
- Cross-Border Trading Benefit: Traders can exploit price differences in different regions.
- Automation: Automated bots can efficiently handle most of the analysis and monitoring, though they can be costly.
Disadvantages
- Volatility: Cryptocurrency price volatility and transfer times between exchanges can increase the risk of losses.
- Lower Returns: The low-risk nature of arbitrage typically results in lower returns.
- Regulations: Traders must comply with the legalities of crypto arbitrage in different regions.
- Monitoring: Constant monitoring of price differences across exchanges is required.
- Delays: Withdrawal delays and technical challenges can result in losses.
- Account Setup: Multiple exchange accounts and wallet setups are necessary.
- Fees: Exchange fees, including withdrawal and platform fees, can reduce profit margins.
Despite the risks, crypto arbitrage is a relatively low-risk entry into the market for those unfamiliar with crypto. In South Africa, Crypto Arbitrage Service Providers (CASPs) mitigate many risks. Credible CASPs like Currency Hub:
- Are regulated by authorities.
- Provide guidance through the Foreign Investment Allowance approval process and offer credit to optimize the process.
- Monitor markets for favorable exchange rates and ensure quick acquisition of stablecoins.
- Seamlessly transfer funds across borders and execute sales at optimal prices.
- Ensure compliance with South African financial regulations.
- Strive to optimize risk-adjusted returns for each arbitrage investment.
By trusting a credible CASP, clients benefit from their expertise and infrastructure without needing to delve into the complexities of the digital asset market or international finance. South Africans with tax clearance from the South African Revenue Service (SARS) can invest up to R11 million per year in crypto arbitrage, with most CASPs requiring a minimum of R100,000. Based on current spreads, typical net profit targets range from 1-1.5% per trade, translating to an average annualized return of around 70%.
Currency Hub, a South African CASP operating since 2017, emphasizes the importance of choosing a reliable ASP. They highlight that while no investment is without risk, proper regulation and experience can significantly mitigate these risks. For instance, Currency Hub has never incurred a loss because they trade the foreign exchange simultaneously to lock in profits before committing to trades. It’s crucial that CASPs execute transactions on reputable exchanges and “over-the-counter” providers to minimize risks.