The narrowing crypto arbitrage gap is a ‘passing phase’

Written by Ciaran Ryan. Posted in Journalism

Reasons cited for the dwindling gap range from the Africrypt ‘hack’ to the general slump in crypto prices. From Moneyweb.

Crypto prices in SA are likely to remain at a premium as long as exchange control regulations that limit their supply into the country are in place. Image: AdobeStock
Crypto prices in SA are likely to remain at a premium as long as exchange control regulations that limit their supply into the country are in place. Image: AdobeStock

There’s no doubt that crypto arbitrage has become a booming business in SA, attracting a growing number of providers.

It involves exploiting differences in crypto prices on different exchanges. For example, bitcoin can currently be bought on overseas exchanges at about at 2.7% less than on SA exchanges.

This is known as the crypto arbitrage gap or premium, and it varies considerably depending on supply and demand. Back in 2017, the ‘arb gap’ reached as high as 30% at times – meaning you could make a 30% profit buying bitcoin abroad and selling it on a local exchange. That gap has reduced to around 1-3% in recent weeks, an even went negative for a brief period – meaning it was cheaper to buy bitcoin in SA than abroad.

Read: Sars puts a crimp in crypto arbitrage

Moneyweb reached out to crypto arbitrage providers to explain what has happened to the ‘arb gap’ and whether the recent narrowing in price differences is permanent or a passing phase. All agree: it’s a passing phase.

Farzam Ehsani, CEO of crypto exchange VALR:

The SA crypto premium has narrowed over the last few weeks but this is something we have seen before. Recently the arbitrage gap has been at around 2% or less and on some days even negative – meaning that buying crypto is actually cheaper in SA than other parts of the world. However, the arbitrage gap has always oscillated. Earlier this year it was at the same levels as today before swinging back up to the 5% level. We’ve served several hundred clients through our VALR Arbitrage product over the last few months and only execute the trades during favourable market conditions.

Exchange control regulations in SA limit the supply of bitcoin into the country and as long as these regulations last I think we’ll always see some sort of a premium to crypto prices in SA.

We’ve found that even at these arbitrage levels our VALR Arbitrage clients are happy as they can monetise their own exchange control allowances which is literally infinitely better than not taking advantage of the arbitrage at all. And through our referral programme, clients can earn a 10% commission on VALR’s fees for all their referrals as well which is a great enhancement on their arbitrage gains.

Andrew Droussiotis, co-founder of BitInvest:

The arb gap is actually back. It has been above 3% most of [at times] last week so for our company as long as it stays in this bracket we will be trading again.

This has happened many times before and will always happen but I believe that until crypto has been regulated by our government there will always be arbitrage gaps.

There are a few factors that cause this gap: exchange rates, the price of bitcoin, and the volume of bitcoin [and cryptos in general] being bought and sold.

Chris Harmse, head of global trading at Coindirect:

We have seen the crypto arbitrage gross premium trend lower over the last few months, which has happened before and can remain low for long periods. Using a cake analogy, the arb premium is not dissimilar: lots of things go into it, but many are not identifiable.

Outside of the structural reasons (such as exchange controls, and the fact that only retail clients can do it), a couple of things drive the premium in my view:

  1. The level of retail participation in and bullishness on cryptos generally; more interest in cryptos drives the demand in SA, and given the ring-fenced nature of SA liquidity pools, this affects the premium as more rands chase fewer crypto assets.
  2. Forex and crypto volatility; higher volumes drive better arbitrage opportunities (but frustratingly that relationship doesn’t always hold).
  3. The size of the volumes doing crypto arbitrage has increased competition and this is definitely having an effect as each spike in the arb premium is quickly hammered by lots of capital waiting in the wings, ready to pounce.

It’s clear that lower arb premiums are probably here to stay but structural issues (such as exchange controls) will keep the arb open to some degree.

Crypto arbitrage will probably remain profitable, but it is important to hedge one’s forex exposure, given the lower gross premium and hence lower expected profitability on each arbitrage trade.

Lloyd Brown, head of emerging markets at Easy Crypto:

When Easy Crypto started in New Zealand in 2017, it was originally an arbitrage platform. As the markets have matured over the last four years we have seen the arbitrage opportunities reduce. This has been due to more liquidity in the market and more fiat on and off ramps, enabling more efficient market dynamics.

I expect the arbitrage opportunity to further reduce with time, except for those countries and currencies with limited liquidity options.

Once regulations are introduced which provide an SA Reserve Bank balance of payment code to remit funds offshore for purchasing digital currencies, I would expect the arbitrage gap for South Africa to reduce to almost zero.

Jon Ovadia, CEO of Ovex:

We’ve been through similar periods in the past when the arbitrage premium virtually disappeared for weeks and even months. There was a long period in 2018, for example, when the arbitrage premium ranged between zero and about 1% and 2%. The arbitrage premium will return. It always does in countries like South Africa that have exchange controls. We’re always going to pay a premium for internationally-traded assets like bitcoin and stablecoins like True USD (TUSD).

We believe the Africrypt hack, if that’s what it was, has dissuaded a number of people from participating in crypto arbitrage in the last month, and we think the extent of this hack is way overstated – and that is putting people off cryptos in general, and crypto arbitrage specifically. That said, we do expect the arb premium to widen, as it has always done in the past.

The key determinant of the arbitrage premium for bitcoin is supply and demand, and we’ve seen prices of cryptos such as bitcoin drop roughly 50% since April. This is a key contributor to the narrowing arb premium.

When volatility returns to the market, the arbitrage premium widens. And as long as we have exchange controls that place a limit on South Africans’ ability to acquire foreign exchange with which to purchase internationally-traded assets like bitcoin, we are going to have opportunities to make profits from crypto assets.

Ciaran Ryan

The Writer's Room is a curated by Ciaran Ryan, who has written on South African affairs for Sunday Times, Mail & Guardian, Financial Mail, Finweek, Noseweek, The Daily Telegraph, Forbes, USA Today, Acts Online and Lewrockwell.com, among others. In between he manages a gold mining operation in Ghana, and previously worked in Congo. Most of his time is spent in the lovely city of Joburg.