Photo by Executium on Unsplash.
In March 2021, one of the most popular bitcoin arbitrage funds started unravel. According to Bloomberg, the fund was backed by Grayscale Bitcoin Trust (GBTC), which was backed by Bitcoin (BTC). GBTC was trading at a premium over the Bitcoin it held because investors continued to invest excess cash in the trust when they did not want to hold BTC directly. This pushed the GBTC share price above the value of its underlying asset – Bitcoin.
Arbitrage is the act of buying something in one market and selling it for a higher price in another. In the case of GBTC, several hedge funds noticed the difference between GBTC and BTC prices, borrowed BTC, deposited them with GBTC for the highest rated stocks, then sold the GBTC stocks and pocketed the difference.
It is essentially arbitration.
“But it’s a risky form of arbitrage,” says Jon Ovadia, CEO and founder of South African cryptocurrency exchange Ovex, which offers a arbitration service which guarantees its investors secure returns. “As long as there is a difference in market prices, arbitrage is possible. But this arbitrage method is risky because it is pinned on a volatile underlying. It can collapse at any time. “
And it collapsed, even before the price of Bitcoin fell in May 2021. A confluence of factors, including a slow rally in Bitcoin, caused GBTC’s net asset value to drop 11.6% in March. 2021.
“We have brought together many smart minds at Ovex to provide an arbitration service that is both sustainable and returns guaranteed,” says Ovadia. “And Ovex’s huge level of liquidity means we can guarantee the capital. Investors never lose a cent in an arbitrage trade. We even reduce our own spread if the yield on any arbitrage spread is less than 1%. “
By capitalizing on the historical difference in price of cryptocurrencies in South Africa between foreign and local exchanges, Ovex is able to purchase cryptocurrencies at the lower foreign price through its UK-based exchange and from sell them simultaneously on the South African stock exchange, regularly pocketing an average of 2% to 5% for its clients because of the price difference.
The Ovex spread is capped at 1%. If the arbitrage spread of the transaction is less than 1%, Ovex reduces its spread accordingly. The capital is always guaranteed so that customers never suffer a loss. Ovex covers all losses due to its enormous liquidity.
By trading simultaneously, Ovex virtually eliminates any risk of price fluctuations. But the company is taking its risk reduction strategy one step further: it has partnered with stablecoin TrueUSD (TUSD) – a coin backed 1: 1 by the US dollar – and thus removed all other possibilities for wild swings. prices.
Stablecoins are cryptocurrencies backed by an underlying asset and are therefore much less sensitive to unpredictable fluctuations.
TrueUSD has seen arbitrage gains of up to 8%.
“We focus on our customers,” says Ovadia. “We fully intend to become South Africa’s premier cryptocurrency exchange. The only way to do this is to make sure our customers are winners. We take a fixed spread of 1% rather than a profit split, because we want to offer the private and institutional investors who work with us the best possible returns. “
Ovex is fast becoming this premier exchange. He recently raised $ 4 million in Alameda Research capital as part of an exclusive funding round. The company is also in the process of building a fully regulated hedge fund that will help bring in an average of 23% of APY to investors.