It’s been nearly 16 years since Bitcoin went live… And through all its trials and tribulations, the largest crypto is now accepted as an alternative and viable asset class. If you’re a South African Investor member, you may have already profited from some of our cryptocurrency trade ideas. But one of the most exciting crypto trades available to us south Africans right now is Crypto Arbitrage.
I introduced MoneyMorning readers to it recently – You can read that article here – Many of our readers were very interested but sceptical and wrote to us and asked if they can trust this form of trading.
That’s why I’ve compiled today’s QA to help you understand the world of crypto arbitrage…
What is Crypto Arbitrage and how does it work?
Crypto arbitrage doesn’t attempt to predict any price movements. Instead, crypto arbitrage takes advantage of price differences of a cryptocurrency on different markets. That means, you buy at a lower price on one exchange and sell at a higher price on another to bank a profit.
And all the risk can be eliminated and the profit virtually guaranteed – because you are simply playing the difference in the foreign exchange price not the price movement of the crypto itself.
What returns can you make on crypto arbitrage?
Because Cryptocurrency is relatively new, the markets are less efficient and the price difference between markets is typically 1% net of all costs. In other words, you could generate a return of 1% every day from crypto arbitrage.
1% may not sound like much but think about it…. That’s effectively 30% a month or 365% in a year!
For example, if you were to complete five transactions using just R200 000 starting capital with each transaction returning 1%. That would translate into R2,000 profit on each trade, once you complete the five trades, that is R10,000 profit or 5%, which can be achieved in approximately one week.
What is the minimum investment?
Typically, the minimum starting capital for crypto arbitrage is R100,000.
However, it’s recommended you start with at least R200,000 as some costs are fixed, so R200,000 or more helps optimise the profitability.
Is Crypto Arbitrage safe? What are the risks?
Crypto Arbitrage is very different to buying Bitcoin directly through an exchange or investing in an ETF that tracks Bitcoin’s price.
With arbitrage, you are simply playing the difference in the foreign exchange price not the price movement of the crypto itself.
Trading Bitcoin like a normal share means if the price moves against you you lose money and unfortunately because it is unregulated, there are lots of scam sites luring you to trade cryptos.
The other risks include the actual exchange getting hacked or being bankrupted, so you can lose all your investment.
With crypto arbitrage it is something that is typically performed by a fully regulated Financial Service Providers (FSPs) like Finova
A FSP is a company licensed with the Financial Sector Conduct Authority (FSCA) to render financial services to the public. It’s illegal to operate as an FSP, without being registered and licensed.
So, always confirm any company that’s offers crypto arbitrage services is registered with a “FSP Number”. You should be able to find this information on their website. Or you can verify an FSP’s number on the FSCA website.
Remember, crypto assets are financial products. This means, they’re subject to FSCA regulations.
The FSCA has issued Crypto Asset Service Provider (CASP) licences to companies who provide crypto services. Crypto regulations such as these help prevent crypto scams.
Do you have to pay fees on crypto arbitrage?
Crypto arbitrage can incur various costs, primarily Swift fees, forex fees at the banks, exchange fees, and of course the fees the arbitrage service provider charges.
These fees can differ depending on the service provider – so always ask before your part with your money. You can also go a step further and compare fees with multiple FSPs that offer crypto arbitrage.
Why aren’t more SA investors flocking to crypto arbitrage?
Firstly, I think the biggest impediment is most South Africans don’t have R100k or R200k lying around. This is no surprise in a struggling economy such as SA.
Secondly, a lot of people believe crypto is synonymous with scams. And I don’t blame them. Many people have fallen victim to various crypto scams – leaving them with huge losses.
But as I ‘ve mentioned, the FSCA have implemented strict crypto regulations over the past couple of years. Companies who offer crypto services MUST be registered.
Thirdly, I think people misunderstand the difference between owning Bitcoin/cryptos directly and crypto arbitrage. As I explained earlier, they’re completely different investment products in terms of returns, risk, and process.
Simply put – Crypto arbitrage is not for everyone. But for those who are interested, it’s a neat way to generate extra income every year.
And remember, don’t forget to pay tax on your profits, as arbitrage profits are recognised as income tax.
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