What are the risks of arbitrage?

Johannesburg, 18 Jun 2021
Read time 4min 30sec

What is crypto arbitrage?

Just like traditional arbitrage, crypto-currency arbitrage is the process of leveraging price differences to your advantage.

As OVEX CEO Jonathan Ovadia explains: “Arbitrage has been around for ages and is nothing new in the investment world.”

You observe this trading process in commodities and many other financial markets. So, it naturally progressed into the crypto world.

Key differences between traditional and crypto arbitrage include crypto working with virtual assets and markets that are more volatile.

However, this volatility is precisely where the opportunity for generating profit exists.

Such a disparity between exchanges means you can purchase an asset at a lower price on one exchange and sell the asset for a higher price on another. Thereby, pocketing the difference.

Simply put: taking a product to a different market and selling it for a profit.

And just like any trading in other industries, there is a risk associated with crypto arbitrage.

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So, how does it work?

Without a single dominant exchange to dictate the value of a crypto-currency, value is determined by the amount people are willing to pay.

This means that if traders rush to purchase a crypto-currency at a particular price, trading volumes will surge, causing price discrepancies to emerge.

However, it takes time for smaller exchanges to update to the new prices. This inefficiency in the system is what allows traders to leverage greater returns in the market.

As long as the crypto markets remain imperfect, investors who are on the ball can capitalise and make a healthy return.

Interestingly and perhaps counter-intuitively, despite volatility and price disparities, when it comes to crypto-currency, arbitrage is one of the less risky investments one can make.

You’re not betting on price moves. Rather, you’re waiting for the right moment to buy an asset cheaper on one market and sell it for a higher price on another market almost simultaneously. Thus, reducing your risk.

But it is essential to understand the potential risks and to be aware of factors that can eat away at your profits.

Some of the major risks include:

1. Price fluctuations. These are to be expected but price drops can significantly deplete your expected profit if you don’t move your money fast enough. OVEX uses stable coins, like True USD, to mitigate this risk. They lock in your profits regardless of how long it takes to ship money overseas, purchase crypto-assets and then return them safely to SA all instantly.

2. Counterparty risks. As you’re moving assets offshore, from one bank to another and over exchanges, there is room for counterparty risks. For example, when your currency is in an international bank, you run the, albeit very low, risk of the bank going bankrupt.

3. Hacking. Like any other Internet safety measure, be cautious of phishing e-mails and scams designed to access private information.

4. Delayed transactions. Blockchain congestion,due to many transactions taking place simultaneously, can slow down your transaction. Delays prevent you from getting in and out of the market as fast as you can. This increases your exposure to volatile market fluctuations, thus increasing your risk of a loss. A great benefit of crypto-currency arbitrage through OVEX is that you get instant trading; ie, the prices you see are the prices you get. So, you don’t lose out on arbitrage profits due to delayed trades.

How you can mitigate some key risks

  1. Act quickly.
  2. Factor additional charges and check they are less than the price difference. Otherwise, this will deplete your profit.
  3. Arm yourself with the correct tools and knowledge.
  4. Use Ovex’s automated arbitrage service

Fortunately, the complexities of the crypto world don’t have to make trading inaccessible.

Consider using a virtual asset service provider that can do the heavy lifting for you.

For example, OVEX puts in place the following measures to make sure the client will make a profit:

  1. OVEX applies a flat 1% spread for all arbitrage services.
  2. To further protect your investment, the OVEX spread dynamically reduces if the arb is low to make sure the client doesn’t lose money.
  3. Capital is always guaranteed on the trades as per the OVEX Arbitrage Terms of Service. So even if there is a loss, OVEX will cover it.

While the arbitrage premium can be low, it is often very high. Therefore, OVEX’s fixed 1% flat spread becomes just a small percentage of the total profit customers stand to make.

When considering a virtual asset provider, you might want to consider this type of system rather than a shared profit structure.

Are you ready to invest?

With instant trading, low spread, and an intuitive platform, OVEX has built its name as the premier crypto arbitrage service provider in SA.

To find out more about how you can get the best returns available in this fast-emerging market, click here to learn more about Bitcoin arbitrage from OVEX.

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