The crypto space has attracted a vast amount of interest as the world becomes more digitized. This comes with positives and negatives. We have all heard the stories of the incredible profits that can be made through the trading of cryptocurrencies but on the other end you also don’t hear of the vast risk you take and the many losses that also take place. Arbitrage is a much more efficient and less volatile way to make excellent profits, with minimal risk. Even in times, like now, where markets worldwide are seeing a downtrend, high volatility & fear is in the air, there are still ways this market can be lucrative. One of the services that Fivewest (FSP 51619) offers is that of Arbitrage trading, where crypto assets are purchased overseas and sold locally at a higher price. Arbitrage is the term that translates when a trader can harness a profit from the act of simultaneously buying and selling the same financial asset, in two different exchanges, at different prices. In essence, spotting an opportunity where the same asset is priced differently and capitalizing by buying at the lower price and selling at the higher price.
For example, bitcoin may be trading at R700 000 on an overseas exchange and R715 000 in South Africa. If you buy the bitcoin on an overseas market, and sell the bitcoin on a local market, you will be capturing that profit difference of R15 000 which is over 2% profit from the price of bitcoin overseas, R700 000. A few years back, the difference in price of bitcoin on foreign and local exchanges was much larger, averaging between 5%-15%. As time has passed the pricing gaps have significantly narrowed to roughly 2%-5% in the last 3 years, however on the rare occasions the
premiums have been seen to increase to high’s of 8%, a team of expert traders is often needed to make sure these sudden increases are capatalized on. Fivewest charges one of the lowest fees within the South african market, at only 0.5% to do this service for you.
Tax Laws Affecting Crypto Arbitrage
Every Tax-compliant South African has an allowance that permits you to transfer up to R1 million offshore, in one calendar year without requiring a Foreign Tax Clearance. Thereafter, one can apply for a Foreign Investment Allowance (FIA) of R10 million, which could annualise a return of R200 000 – R500 000 (2%-5%) while not being exposed to any significant risks.
An arbitrageur therefore captures favourable prices on different markets or exchanges, capitalising from the imbalance in prices. The principle of arbitrage remains relatively unaffected by cryptocurrency prices, in fact the presence of volatility and the decrease in cryptocurrency prices tend to increase the arbitrage spreads favourably due to the time delay between overseas markets and the South African exchange. Arbitrage is fuelled by volatility, the greater the volatility of crypto and Rand prices, the higher the opportunity for mismatched prices within the markets,
essentially leading to a wider availability of arbitrage opportunities to profit from.
Crypto arbitrage has conveniently removed significant risks for ordinary traders to partake, simplifying the process and making it accessible for investors to make quick profits, with little to no risk. Further providing peace of mind, the act of arbitrage trading, typically referred to as ‘risk free’ is due to the fact that purchase and sell trades are done simultaneously, therefore locking in favourable prices and limiting the exposure of any open positions being held on an exchange at any time. Essentially, the only risk that investors are exposed to is the extremely low risk of the
currency devaluation and counterparty risk of the exchange, essentially making arbitrage trading extremely attractive to risk averse individuals. Fivewest does not hold any open positions to further mitigate the risk clients are exposed to.
There are various types of arbitrage opportunities within financial markets. Fivewest makes use of stablecoin arbitrage due to the fact that crypto arbitrage is superior to other trading strategies, as the accumulation of profits is faster paced in nature. A stablecoin is a cryptocurrency that is designed to remain consistent with the price of very strong fiat currencies (e.g. US dollar) as Stablecoins aim to peg their value to another asset. Fivewest makes use of USDT (the world’s largest stablecoin), USDC and TUSD, some of the biggest known Stablecoins within the market
as an extra measure to ensure safer trading.
Crypto Arbitrage is a great way for conservative, risk averse individuals to make a quick, yet secure profit in the ever-changing, fast paced world of Cryptocurrency.
*Disclaimer: None of the information in this article should be read or taken as financial advice whatsoever. Always speak to financial professionals before making financial decisions.