How to profit from bitcoin without volatility
We know from blockchain research firm Glassnode that a high percentage of new entrants to bitcoin are currently underwater following the May 2021 price drop.
Bitcoin fell 47% from its February high to its May low, which is by no means unusual, but what is a record is the price drop of $ 11,506 in a single day on May 19.
As the bitcoin volatility index chart below shows, there is nothing exceptional about the recent bull market in terms of volatility, which is still well below the peaks of 2013 and 2018, followed by drops of spectacular prices. However, there were also occasions when the volatility index was above 4 (such as in 2020) which had virtually no effect on the bull market that had just started.
Bitcoin Volatility Index (measured by% price change)
Chris Harmse, global head of trading at crypto arbitrage provider Coindirect, notes that crypto arbitrage opportunities have remained relatively unchanged whether bitcoin is in a bullish or bearish market.
“In fact, what we’ve observed over the past few weeks amid a bitcoin price collapse is that the arbitrage opportunities have been better than they were earlier in the year.”
Arbitrage is the exploitation of price differences in trading bitcoin on local and foreign exchanges. This price difference is generally between 2% and 5% and has momentarily increased to 15% in recent weeks. Harmse explains that there is a time lag on SA crypto exchanges as bitcoin prices fall. “Bitcoin is generally more expensive on South African exchanges than on foreign exchanges, and we are helping our clients reap this price difference without incurring too much risk.”
After the price hike in early 2021, bitcoin failed to decisively break above $ 65,000. The price remained in a range for several months, causing volatility to drop. That changed in May 2021 when Elon Musk overturned an earlier decision to allow customers to buy Tesla vehicles using bitcoin, and the Bank of China warned against using cryptocurrencies as a means of payment.
The price of bitcoin quickly fell 44% from its peak in May, plunging millions of newcomers to bitcoin underwater.
Those who took advantage of arbitrage opportunities were able to not only protect their capital, but also increase their equity by 2-3% over the past three weeks, according to Harmse.
Why arbitrage is the antidote to bitcoin’s volatility
Harmse says arbitrage is the antidote to bitcoin’s volatility for the following reasons:
- Coindirect clients are only exposed to the bitcoin market for a few minutes, which significantly reduces the risk of being caught in a stock market crash.
- Customers can set the desired minimum net profit, within reasonable limits (for example, by instructing Coindirect not to execute transactions that will generate a net profit of less than 2%).
- The profits of arbitrage are reflected in the client’s account within minutes.
- Coindirect uses its own bitcoin and cash liquidity to create a ‘closed loop’ arbitrage where it is able to lend clients bitcoin or currencies to execute trades within minutes, eliminating the need to wait for the client. forex either shipped overseas or bitcoin shipped to its SA exchange. This is how he is able to offer clients a three-minute arbitration from start to finish.
- For the above, Coindirect charges a flat rate of 1% of the invested capital. There is an additional Swift fee of R500 plus a handling fee of 0.35%, for a total of 1.85% per trade.
- Customers need a minimum of R100,000 to take advantage of the arbitration service. South Africans can use their discretionary allocation of 1 million Rand per year (no authorization is required from the authorities), plus 10 million Rand of Foreign Investment Allowance (AIF), for which you need a tax authorization from the South African tax authorities.
- Coindirect engaged the services of tax specialists to help them obtain tax clearance for the R10 million AIF.
Coindirect recently raised € 1m (Rand 17m) in a Concentric-led seed funding round, with participation from Blockchain.com and MakerDAO-backed Andreessen Horowitz.
With its headquarters in London, Coindirect has grown and now has offices in the UK, South Africa, New York and Hong Kong.
In addition to its arbitrage service, it provides its 321,000 users with a platform to buy and sell more than 40 cryptocurrencies and offers a cross-border payment service with same-day settlement.
It also operates an over-the-counter (OTC) office for businesses and private clients to conduct high volume crypto transactions. Since its launch in 2017, Coindirect has transferred over 300 million euros (5.1 billion rand).
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