You can also listen to this podcast on iono.fm here.
CIARAN RYAN: Many people have attempted to write the obituary for crypto arbitrage, but each time it seems to bounce back with a vengeance. Just in the last few days the arbitrage premium jumped above 3%, even touching 3.5% at some points. All this is happening while Bitcoin is breaking new all-time highs, cracking R1.3 million in the last week.
Bitcoin and cryptocurrencies may be just too volatile for some, where gains and losses of 10% a day are not uncommon. So does crypto arbitrage offer a safe avenue for investors? Crypto arbitrage is where you buy crypto such as Bitcoin on overseas exchanges, and you sell them in South Africa for a premium or profit. These crypto assets typically trade at higher prices in South Africa because we still have exchange controls.
To explore this further we are joined by Andrew Ludwig, who is CEO and co-founder of Currency Hub. Hi Andrew, good to talk to you. We’re a little over two months into 2024 and a lot is happening in the crypto arbitrage market. I noticed that the premium was about 2% in January, then it seemed to fall off a cliff in February. Now it’s back up again – above 3% over the weekend.
I noticed you didn’t trade in February. Why was that?
ANDREW LUDWIG: Thank you, Ciaran. It’s great to be back. So what is driving this premium? There are a couple of points that are behind this.
Number one is the maturation of the stablecoin market, specifically the Tether and rand pair. We’re seeing a huge demand in this particular area right now. The strengthening rand means that there are more buyers of Tether and rand pairs while the third-party loans that have been doing their rounds have been washed out by the last bank offering the service. And, as such, fewer people will be doing the arbitrage.
And last but not least, the FSCA [Financial Sector Conduct Authority] regulation is hopefully playing a part in discouraging nefarious unregulated activities.
To your latter point, and why we didn’t trade last month going into February, we anticipated lower premiums because of two factors. The budget speech – which had a negative influence on the rand – caused an aggressive sell-off. As you know, we like a strengthening rand in the arbitrage space.
And the second point, which we touched on earlier, was the NCR loans – the third party loans. Because of the last month of using this particular vehicle, many people were just trading out at whatever prices they could get, and that overtrading severely compressed the premium. Anyhow, we were confident that the premium – which was currently under 1.4% – was [for] a temporary period in time, and as such we halted our trading primarily to protect our clients’ allowances until we saw the rand/dollar improvement – which coincided with the end of these loans. And as a result we saw the premium bounce back up to 3% currently.
CIARAN RYAN: I do notice that there is not a strong but a fairly loose correlation between the exchange rate and the crypto arbitrage premium. When you have, as you said, a strengthening in the rand we tend to get a strengthening in the crypto-arbitrage premium as well. Is that what you’ve noticed?
ANDREW LUDWIG: Ciara, our returns have been exemplary, all things considered. If we think about last year, what a tough year it was for the entire arbitrage industry. Most of the players were unable to trade for as much as six months. We, however, were unaffected by that.
And where it stands out for us is – as you know, we come from a traditional investment background, hedge funds and trading desks to be precise; here we have experience in trading equities, derivatives, currencies across global markets, including cryptos, for eight years or so. And with this comes a deep understanding of macroeconomics, behavioural finance, and general market dynamics and technical trading.
Now, being a discretionary arbitrage manager, this allows us to execute the arbitrage intraday at the most profitable times that present themselves – not first thing in the morning like a lot of the competition. This allows us to also halt trading, as we did in February, unlike our competitors who were forced to trade because of the infrequency of their trading cycles.
Now the experience of all the stuff around macroeconomics and hedge funds, etc, affords us to also be one of the most regulated arbitrage providers with the FSCA and ethics licences in-house, which contribute to a very sophisticated infrastructure allowing us to make multiple trades across multiple exchanges and OTC desks. OTC herein is ‘over-the-counter’, an alternative to trading on the exchange applicable to service provider trading large volumes of the assets that we do.
Now, having opportunities to trade across exchanges and OTC desks allows us to manage the redundancy and counterparty risk while also increasing our client returns, remembering that we were one of the few guys who were able to trade out last year.
Now, back to your point about how our profits have been. Where we can see in the cycle, we are generally trending between 10% and 20% higher than most of our competition because we have the licences and infrastructure as described earlier.
But here’s the sweet point. We can book trades three times a day; and being able to trade for a single client three times a day – when we see the premium open it up like it has recently – allows us to generate extra profits.
This ensures high returns for our clients. This is limited to us in many ways, because much of our competition comes from a data science background, who don’t have the necessary experience to get all the financial services licences that we’ve accumulated over the years. And, as such, their algorithmic trading is limited to two or three times per week, often taking whatever price they can get just in order to get through their client’s allowances.
CIARAN RYAN: There’s been a lot of activity around Bitcoin exchange-traded funds or ETFs. There’s also the upcoming halving of Bitcoin in April. Explain why these are important events and how this is likely to impact demand for crypto and the arbitrage premium.
ANDREW LUDWIG: Ciaran, what an interesting few weeks it’s been.
If we consider that BlackRock’s Bitcoin ETF, referred to as IBIT, is recognised as the fastest growing ETF in history – I noticed in the press recently it has overtaken the assets under management of MicroStrategy; well, Bitcoin under management to be more precise – essentially this is a land grab, Ciaran; with several other large institutions in hot pursuit of all of these clients, trying to meet the demand for Bitcoin, which is 10 times of what is currently being mined.
And what that means – and referenced to this halving, which occurs at around the 20th of April; that event alone would suggest that the demand for Bitcoin would jump 20 times. Anyhow, the tailwinds are certainly positive, but there is no doubt a whole lot of turbulence ahead.
Now, with reference to my earlier comment around our understanding of macroeconomics and behavioural finance and general market dynamics, this is music to our ears. The playlist is called volatility, which will present intraday opportunities around digital assets and capital markets, which our active trading strategy is purposely designed for.
CIARAN RYAN: Let’s talk about regulations and the licences which are about to be issued to crypto providers by the Financial Sector Conduct Authority, the FSCA. You have several licences already in the bag. Maybe explain what these are and how they contribute to your active trading strategy and alpha, as you mentioned – alpha being another word for profits.
ANDREW LUDWIG: Thank you Ciaran. As you know, I keep harping on about this, but regulation is good, otherwise we wouldn’t see the likes of these ETFs blowing up and becoming a present for us and the retail investors across the USA.
Now the FSCA, as you know, is well ahead of most other countries in terms of regulation, and anyone wanting to participate in cryptos in the financial services space needs to have a CASP – Crypto Asset Service Provider – licence. The FSCA is doing random site visits and we expect to receive our CASP licences soon, among a few others.
Now, clarity on that. The Category 1 FSCA licence allows us to provide an intermediary and an advisory service, or a Category 2 discretionary licence allows us to book trades and pool assets on behalf of the client.
Now this is how our trading style works.
Here we simultaneously hedge the foreign-exchange component so that there’s no currency risk, and then we negotiate a bulk trade which eliminates the premium risk.
And at this exact point in time we can see the profits available before we execute on the trade. Hence we never have incurred a single loss since 2017.
So essentially if you don’t have a Category 2 discretionary licence, your ability to do the arbitrage is very much limited. This Category 2 licence also accounts for the bulking and when you decide to trade; so, according to the FSCA, if you’re doing either without the licence you are breaking the law and the investigations unit, which you interviewed a couple of weeks ago, will likely pursue these bad actors.
CIARAN RYAN: Okay. You’ve been around for a while in this space, with not a single losing trade since 2017. That’s quite a spectacular record. What does the future hold, and are you planning on launching any new services?
ANDREW LUDWIG: Ciaran, our focus has been stubbornly addressing the arbitrage opportunity, and we remain focused on the arbitrage.
But in that particular proponent the integration programme for our arbitrage peers has been a really popular and growing area of our business. This is specifically to people and companies who didn’t have the appetite to go the FSCA route and go through the laborious process of compliance, etc. But this has been successful because it ensures that those business owners continue to earn an arbitrage revenue for themselves and their clients, who in turn would also benefit from the generous referral programme.
At an industry level, in the interest of consumer protection we want to encourage the growth of this industry but ensure the high standards imposed by the FSCA are adhered to by the CASPs, the crypto asset service providers in the same way traditional asset managers and financial service providers have done for years.
Here we have established an incubator, which I touched on in conversation with you previously – an incubator, which is also an FSP, a financial service provider – and a client applying for the cash licence as well.
Here we partner with traditional and crypto businesses which include fund managers and crypto and ethics traders, custody providers and local exchanges, just to name a few. These guys all need support in compliance operations and they need to become regulated.
They also benefit from access to our intellectual property and importantly our network for integrations and for funding. And here we are working closely with several exchanges, both locally and abroad, on various trading solutions and strategies and [we] are hoping to make this thing available to as many people and like-minded individuals as possible.
CIARAN RYAN: Okay, we are going to leave it there. It looks like an exciting future, an exciting year ahead for crypto assets and for crypto arbitrage. Thank you very much. Andrew Ludwig is CEO of Currency Hub.
Brought to you by CURRENCY HUB.
Moneyweb does not endorse any product or service being advertised in sponsored articles on our platform.
