Taking advantage of arbitrage
Crypto-currencies are fast becoming a must-have component of every investment portfolio. The growth in the value of the various currencies, and especially Bitcoin, has caught the attention of the investor community triggering a growing interest in finding ways to profit off this still relatively new investment class. While the strategy of buying and holding Bitcoin as a safe harbour in uncertain times, or trading it as the value of the currency fluctuates against other currencies remains the most popular way to profit, there are more ways to extract value from crypto-currencies.
Jonathan Ovadia, Ovex CEO, explains that arbitrage represents one of the emerging growth areas for crypto-currency investors.
Arbitrage as a business strategy is nothing new; simply put, it involves buying something in one place and selling it at a higher price elsewhere, taking advantage of the difference in price between the two locations. While this can apply to anything that has value, the potential fast turnaround between purchasing a digital asset and selling it makes them ideal candidates for arbitrage.
Using your forex allowance
“Because of the multitude of regulations around foreign exchange across the world, the supply and demand of Bitcoin varies significantly,” he says. “Buying Bitcoin from an exchange in South Africa, for example, will cost more than buying it from one in the United States. There are other countries where it is higher still, but strict exchange controls make them less attractive as an option when considering arbitrage.”
For South Africans, the ability to use their foreign exchange allowance to facilitate arbitrage transactions opens this up as a simple and relatively low-risk opportunity.
“South Africans can buy Bitcoin on a US exchange and then sell it on a South African exchange for between 2% and 5% higher. Because this is a live market, the actual percent fluctuates, but these are the values that we have been seeing recently," says Ovadia.
DIY or automate
While many traders manage this process themselves, the process of buying and selling Bitcoin requires careful management. However, he points out, there are services available where this process is largely automated.
“In our experience, it takes about two days for one full transaction to be completed, but selling Bitcoin is almost instant and this removes one of the key risk factors in crypto-currencies – fluctuations,” he comments.
“While the value of Bitcoin has been growing consistently, it has a history of significant ups and downs and this might make some potential investors quite nervous. Arbitrage removes that risk from the equation completely,” he says. “You’re not ‘betting’ on the value of the asset appreciating, you’re simply benefiting from the fact that there is a difference in the cost of the asset between two locations.”
While there are some risks associated with arbitrage, mostly around the ability of the counter-party to fulfil their side of the transaction – taking your money but not handing over the agreed-on amount of Bitcoin – working with an established service provider reduces this risk to almost zero.
He adds that while taking advantage of Bitcoin arbitrage offers high returns, the entire system is completely transparent, and investors can see exactly how it functions at every point. “They could do this themselves, but we’ve automated the process so they can get all the benefits of the opportunity without the effort.”
For investors looking to diversify their portfolios and find new opportunities for high returns, arbitrage offers a tried a tested strategy for leveraging the growing crypto-currency market.