What a weak rand means for crypto arbitrage

The bad news is that a weak rand is typically bad for crypto arbitrage. The good news is that March was a good month when the rand was strong.

Future Forex CEO and co-founder Harry Scherzer points out that even when the rand is weak, crypto arbitrage has performed well, and significantly outperformed most competing investments.

“In March when the rand was strong, our clients were earning 1.5% to 2% a trade, but that dropped to 1% to 1.5% in April when the rand weakened. Even at this weaker profit margin, clients are making about 50% on invested capital per annum of R200 000 over the course of 12 months.”

Scherzer, an actuary by training, says that what drew him to crypto arbitrage in the first place was the opportunity to make consistent returns that were hard to find elsewhere in the market, without exposing himself to the volatility and risks of traditional investments such as equities and bonds.

Scherzer explains that when the rand weakens, there is a lagged effect where cryptos such as Bitcoin are more expensive when priced in the local currency. Bitcoin purchased on overseas exchanges are sold in SA at higher prices, which is how crypto arbitrage providers are able to make relatively low-risk and consistent profits. As the rand weakens, that profit margin reduces and sometimes even disappears. That lagged effect can take days or even weeks to work its way through the market before there is a return to more normal arbitrage spreads.

“But even in these times of a weak rand, clients are still making good profits.

“We do expect the current weakness to be short-lived, and we do expect a return to more normal market conditions where net profits of 1.5% to 2% per trade should be possible. Our client growth has been fantastic as people start to realise that this is a safe and lucrative investment. Arbitrage may not be around forever, so people want to take advantage of it while the opportunity exists.”

What is crypto arbitrage?

Crypto arbitrage involves exploiting price differences in crypto prices between local and overseas exchanges.

Trading involves the purchase of US dollars or euros and shipping these to an overseas exchange for the purchase of cryptos, and then shipping these to SA for sale on a local exchange at a higher price. All this is typically done in less than a day, and repeated again when there is a suitable arbitrage “gap” or profit.

We asked Scherzer to explain the mechanics of crypto arbitrage and the type of clients participating in it.

Give us an idea of the demographics of your crypto arbitrage clients?

Our clients are mainly aged 40 and above, predominantly male but increasingly female as well, often with large share portfolios who use crypto arbitrage as a way to sweeten total returns each year.

What is needed to start crypto arbitrage?

Our minimum is R100 000. It’s preferable if you can do R200 000 or more, as the returns are slightly better, because there are some fixed costs (in the purchasing of forex) that are less significant if you are trading larger amounts of capital.

Clients with tax clearance from the South African Revenue Service are entitled to use R11 million a year in foreign exchange allocations for crypto arbitrage. That doesn’t mean you need R11 million in cash to start trading. With Future Forex you only need a minimum of R100 000, which we trade multiple times on behalf of the client. Future Forex’s in-house tax team will also assist with the tax clearance application free of charge, as a complementary service.

How does crypto arbitrage compare with other types of investments?

Our crypto arbitrage returns have significantly outperformed the JSE All Share index, the S&P 500 and even Bitcoin as shown in the following graph.

Bear in mind we conservatively aim to make 1% to 1.5% net for the client in each trade, which accumulated over time leads to a very smooth equity graph.

So, while there are risks, we are able to hedge out the market and forex risks, which explains why we have such a smooth equity curve. That lack of volatility combined with the high returns is what makes this investment so attractive to clients.

Bear in mind that historical returns are no guarantee of future returns, but I think the graph, as a historical record, speaks for itself.

What are the risks of crypto arbitrage?

There are two primary risks, both of which we hedge out on behalf of clients. This means that these risks are fully eliminated by Future Forex and clients are not impacted as a result.

1. The risk of an adverse move in the Bitcoin price while the arbitrage trade is underway (trades are usually completed in six to eight hours); and
2. Adverse moves in the rand-US dollar exchange rate. Rands must be converted to US dollars and shipped abroad – a process that takes a few hours – so any sharp swing in the exchange rate can impact the eventual profit or wipe it out altogether.

Future Forex, a registered Financial Service Provider (FSP 51884) for currency remittance, fully hedges all forex and crypto market price risk. Once the trade is initiated, the profits are locked in and not impacted by any price fluctuations.

As with any investment there is counter-party risk, meaning any one of our partner institutions we use to execute the arbitrage trade could go bust while a trade is in progress, but we have taken great care to select the best and most well-capitalised partners possible, so we see this as a minor risk given the due diligence performed.

You allow clients to nominate their desired net profit level, but the market is only giving a net 1% to 1.5% per trade at the moment. What’s a realistic profit expectation?

You’re right that the market is only paying 1% to 1.5% at the moment, but earlier this year the level was higher at 1.5% to 2% which, accumulated over the course of a year, makes a significant difference.

A realistic expectation is a net profit of 1% to 1.5% per trade, which can accumulate to over 100% per annum, depending on the number of trades performed over the year. Our clients each have a dedicated relationship manager who assists in setting a minimum return which will maximise the client’s return over the year.

What are the costs?

Future Forex does not charge any management fees and rather shares in the profits earned. So there are no hidden fees or costs. We share in the profits on a sliding scale depending on the investment amount. This profit-sharing model means clients’ interests are aligned with those of the company.

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