It’s been called the worst-kept secret in crypto: buying cryptos such as bitcoin on foreign exchanges such as Kraken and selling them (almost) instantly at a higher price on a South African exchange.
This is known as arbitrage: exploiting price differences in the same asset on different markets.
When bitcoin went into a frenzy back in 2017, that gap got as high 24% and even 30% at times. Those who spotted the gap were making fortunes – every day.
The arbitrage gap has since narrowed to between 2% and 5% (sometimes higher, sometimes lower), though it’s still respectable enough to turn a decent profit.
It’s as close as you will come to risk-free profit, since the arbitrageur buys and sells as quickly as possible to exploit the price difference between the overseas and local market.
This became something of a cottage industry among more tech-savvy investors several years ago, though they didn’t talk much about it for the simple reason that (they figured) the more people spotted the opportunity, the smaller the gap would become.
Commercialising the gap
It was only a matter of time before someone saw a way to commercialise this by making it possible for someone who knows nothing about investments or cryptos to take advantage of the crypto arbitrage gap.
That someone was Jon Ovadia, founder of crypto company Ovex.
The arbitrage gap has definitely narrowed in the last two years, but Ovadia doubts it will disappear completely. Residents of countries with capital controls – such as SA – will likely always have to pay a premium to buy internationally-recognised assets such as bitcoin.
Ovex has grown into a formidable force in the SA crypto space because it has focused on market niches largely ignored by others. Arbitrage is one of them. Rather than bitcoin, Ovex facilitates arbitrage on TrustToken – a ‘stable coin’ fully backed by the US dollar.
The TrustToken is purchased offshore and immediately sold in SA at a premium that has been as high as 5% in recent weeks.
Ovex takes care of all the logistics of buying and selling.
TrustToken is a San Francisco-based stable coin platform with a market cap of nearly half a billion dollars that allows its users to buy cryptocurrency offshore, at the international price, without ever having to leave Ovex.
Locking in the profits
It also offers a post-trade-settlement feature which, coupled with the aforementioned US dollar stable coin, allows clients to lock in their arbitrage profits immediately without having to take any risk at all.
“For example, let’s assume a user has R1 million they wish to use to perform arbitrage,” says Ovadia. “The user would send the US dollar to TrustToken, our partner in the US; at the same time they are able to lock in a rate with our OTC [over-the-counter] desk to sell the Trust US dollar that will automatically be minted to their Ovex account when it arrives offshore.
“This way the user instantly secures their arbitrage profit. They are not exposed to the volatility of bitcoin, the rand, the dollar or any currency. They simply wait for their Swift payment to settle, which usually takes less than 24 hours, before withdrawing their capital and their arbitrage profits, which can be as high at 9% in the current market.”
That’s one part of the Ovex business. It also operates an over-the-counter desk that allows clients to buy or sell blocks of crypto valued anywhere from R100 000 to R100 million.
“No matter the size, we’re able to guarantee a price and instant execution, which does not exist at any other platform in SA,” says Ovadia.
Ovex is doing between $500 000 and $1 million a day in arbitrage-related volume, and is now in the process of acquiring a forex financial service provider to make things more streamlined for its clients.
It is legal
“A question we often get clients asking [is] if the cryptocurrency arbitrage is legal, and the answer is that it is 100% legal. As per the [SA Reserve Bank] Sarb website, South Africans are able to make use of their R1 million a year discretionary allowance and their R10 million foreign investment allowance for buying crypto offshore. We just make the process incredibly easy,” says Ovadia.
There was a time when the Sarb stopped a batch of 100 payments, but after investigation it approved the structure, allowing payments to continue without a hitch since then.
The only limitation for the arbitrage is that users have to use their own funds and are not able to borrow money from anyone except a licenced credit provider for the purpose of crypto arbitrage.
“We are very strict about this and require proof of the source of funds for every client. In order to make the arbitrage more accessible we have a low minimum investment of R50 000, which we are able to do because we have no exchange fees – because we are the exchange.”
Why cryptos are here to stay
Fears of hyperinflation abound since the onset of the Covid scare, prompting governments to ramp up money creation (through bond sales) and this always leads to currency devaluation. The problem is that when everyone is doing it, it’s a race to the bottom.
The rand, US dollar and other currencies are all losing value against gold and cryptos.
Says Ovadia: “Cryptocurrencies give ordinary people a powerful tool to fight this economic scourge and protect their wealth. Unlike gold, cryptocurrency is essentially infinitely divisible, free to store and transport, has a fixed supply, and can earn up to 10% interest in our cryptocurrency interest account. In my opinion any South African not holding cryptocurrency is doing themselves a massive disservice.
“I consider myself a patriotic South African and wish only the best for SA, but one benefit that can’t be ignored is in the event of political and social meltdown one is able to memorise their cryptocurrency keys [12 random words in a specific order] and leave the country with their entire net worth in their heads. Now that is sovereignty.
“And to be clear, this is not a metaphor – because cryptocurrency is just information you will literally be storing in your brain, something that has never been possible before.”
The future of money
Money will inevitably be digital. Roughly 90% of money today is already digital, only it is captured by an antique system called a bank.
“The bank tells you when you can or can’t use your own money, where you can spend it, and the worst part of all, it charges you for access to your own funds,” says Ovadia.
“Crypto allows people to take control of their money. I believe centrally-issued digital currencies issued by reserve banks will be a big leap in the right direction as well, but falls short in many of the key benefits of decentralised and censorship-resistant technologies like bitcoin.”