Crypto arbitrage premium hits ‘new normal’ below 1%

The crypto arbitrage premium – once a relatively risk-free way of earning 30% or more a year – has been on a steady decline and now hovers a little below the 1% level.

There was a time you could purchase bitcoin (BTC) abroad and sell it in SA at a 4-5% profit on the same day.

Those days are gone, but there’s still a flicker of life in the crypto arb, as it is known. It spiked above 1% last week as the rand (ZAR) weakened against the US dollar (USD).

The premium is a result of exchange controls, which mean South Africans are often prepared to pay more for crypto assets that are exchangeable anywhere in the world.

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The chart below from Zarbitrage.co.za shows what has happened to the arb premium over the years.

Many early adopters have fond memories of 2017 and 2018 when the premium frequently reached 10% and went above 20% on more than a few occasions.

This meant you could make a quick 10% or 20% profit buying BTC abroad and selling it the same day on a local exchange.

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It was once a closely guarded secret until professional companies like Future Forex and Currency Hub took over the logistics of moving funds abroad and eliminated much of the risk from currency and crypto volatility.

Thousands of South Africans jumped at the opportunity, using their Single Discretionary Allowance (recently doubled to R2 million a year), and the R10 million Foreign Investment Allowance, for which tax clearance is required from the South African Revenue Service (Sars).

Source: Zarbitrage.co.za

Now the premium averages slightly below 1%.

The reason for this is simple supply and demand, according to an analysis by Silver Sixpence CEO Carel de Jager.

Read: What’s happened to the crypto arbitrage spread?

Demand for crypto – BTC in particular – is nothing like what it was five or six years ago, while supply has flooded the market. One reason for the increased supply is the increase in the SDA, giving South Africans greater capacity to purchase crypto on the international market.

The chart below from Future Forex shows what has happened to the crypto arbitrage premium over the last year. There is a correlation between the diminishing premium and ZAR strength.

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Source: Future Forex

What explains the recent increase in the arb?

“At the start of May, the ZAR found support as cautious optimism around stabilising US-Iran tensions improved global risk sentiment, reducing safe-haven demand for the USD and supporting emerging market currencies,” says Harry Scherzer, CEO of Future Forex.

“The stronger ZAR lifted spreads, following their usual direct correlation.

“However, BTC also rallied over this period, supported by improving risk sentiment and steady ETF [exchange-traded fund] inflows, alongside growing optimism around US crypto regulation. Since spreads are typically inversely correlated with bitcoin’s price, the rally limited further widening in spreads.”

By mid-May, the ZAR was once again under pressure due to stalled negotiations over the Iran-US war and a spike in oil prices. That changed again by the end of May as BTC rallied following bargain buying and surging optimism over crypto regulations in the US, resulting in a widening in the spreads.

Even at this “new normal” spread of around 1%, the crypto arbitrage is still tradeable, with a potential annual return of 10-20%, says Scherzer.

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“It’s a more stable investment option now, rather than one that blows the lights out. Over time, it could still potentially beat the market.”

Source: Future Forex

Warren Deats, CEO of Currency Hub, says the arb premium is lower due to the market becoming more efficient and competitive.

“Historically, the major sellers of stablecoins in South Africa have been the arb desks. What I suspect is happening now is that there are various other players in the market outside of the arb space, such as structural sellers bringing funds in through stablecoins.”

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The arb typically tightens when under the twin actions of ZAR weakness and crypto strength, adds Deats.

The death of the crypto arbitrage market has been predicted for years, yet it is still surviving – albeit with much thinner margins. Given the volatility of crypto and the ZAR, it is likely to be around for a few more years yet.

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