There’s no question that crypto arbitrage has become a popular way for South Africans to dip their toes into the crypto market without exposing themselves to the kind of price whiplash associated with crypto assets like Bitcoin and Ethereum.
Arbitrage traders seek to profit from price differences in the same asset on different markets. For example, Bitcoin can often be purchased 2% to 3% cheaper on overseas exchanges than in SA.
Future Forex is a South African company that has automated crypto arbitrage trading. All trades are fully hedged so that clients are not exposed to movements in forex or crypto prices while a trade is underway. This means profits are locked in from the moment that the trade is executed and profits are known before each trade even takes place.
The company was founded two years ago by Harry Scherzer, a registered actuary with a background in risk management, and Josh Kotlowitz, who has an MSc in space science and engineering. This unusual blend of skills has been applied to developing machine learning systems that tap the best profit-making opportunities for clients.
“We’re very particular about eliminating risk and we have done everything possible to take market risk out of the equation,” says Scherzer. “Our fully hedged system is achieved by locking in the sell rate of the crypto asset at the same instant that it is bought. The risks that remain are small, such as the risk of a particular forex-dealing bank or crypto exchange failing.
“Arbitrage is a well-known low-risk trading strategy.”
“Unlike a typical investment, arbitrage does not predict the price movement of an asset, but rather capitalises on the price differences of an asset between different markets.”
Profit-sharing model aligns client interests with those of the company
Future Forex only makes money when clients do. It shares in the profits and doesn’t charge any trading or management fees. There are no hidden fees or costs. This profit-sharing model means clients’ interests are aligned with those of the company.
The minimum investment amount is R100 000. Clients can use their R1 million-a-year single discretionary allowance (SDA) and R10 million-a-year foreign investment allowance (FIA) – a total of R11 million a year. The profit share taken by Future Forex drops as clients invest more per arbitrage cycle, so those investing larger amounts per trading cycle can expect to make more profits overall. Future Forex has experts on hand to assist clients with the FIA application process at no cost.
The graph below shows the progress of the bitcoin arbitrage ‘spread’ over time. It shows the price difference in Bitcoin between overseas and local exchanges, and that spread has narrowed from 4% to 5% a year ago to 2% to 3% currently. The graph also shows how the costs of trading diminish depending on the size of funds being traded.
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Clients can nominate desired profit target
“One of the advantages we can offer clients is that we allow them to nominate how much profit they want to receive net of costs,” says Kotlowitz. “Obviously, if the market is only offering a spread of 2% to 3%, a client who expects to earn 4% may only get one or two trades a year when the price gap spikes.
“So we have relationship managers whose goal it is to maximise returns to each client over the year by considering their individual circumstances. They do this by assisting clients in setting a minimum targeted return, whereby trades are automatically executed if this return is attained or exceeded.
“Our aim is to make the entire process as automated and passive as possible.”
Regulation
Although crypto asset providers are unregulated in SA at the moment, regulations are likely just around the corner. In anticipation of this, Future Forex has applied to the Financial Sector Conduct Authority (FSCA) to become a financial services provider (FSP), and has partnered with BeztForex, an authorised FSP, for the provision of foreign exchange conversion services.
What crypto assets are traded?
“At present we primarily trade Bitcoin and USDC, a crypto asset pegged to the US dollar, as these offer the highest returns and sufficient liquidity when compared to other crypto asset arbitrage opportunities,” says Scherzer.
“We constantly monitor the market for other crypto arbitrage opportunities but at the moment the arbitrage spread in most other crypto assets is not particularly attractive for our clients. However, that may change over time, and we are always monitoring the situation.”
Why crypto arbitrage is a relatively safe way to enter the crypto market
Most investors will have heard of the astonishing returns achieved in recent years by investing in Bitcoin, Ethereum and other crypto assets. It is not unusual for these assets to show returns of several hundred percent a year, but what is also undeniable is the risk to capital that comes from investing in cryptos. For example, Bitcoin dropped 84% in 2018 after peaking at just over R300 000 in December 2017. It has since recovered and exceeded that price level, but investors had to sit through a nearly 50% drop in price earlier this year.
“Cryptos are volatile, and many people are understandably nervous about investing in them given the potential for sharp drops in price,” says Kotlowitz.
“This is why crypto arbitrage is a much safer and less volatile way of participating in this market. We are not taking any bets on the direction of Bitcoin; we are simply looking to benefit from price mismatches between local and overseas exchanges, and we have fine-tuned the process to the point where we have hedged out all price risks so we can lock in a profit from the moment that we execute a trade.”
The crypto arbitrage market may not be around forever, says Scherzer. “Particularly once regulations come into force and large institutional investors, who are currently excluded from the market because of the lack of regulation, see an opportunity to make profits from crypto arbitrage. This could narrow the spread to virtually zero, so we may be looking at a temporary opportunity. Our advice to South Africans is to take advantage of this opportunity while it exists.”
