Token Arbitrage (Part II)

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(Image : bitcoin.com)

Thanks to your feedbacks and questions on the previous article ( ‘Token Arbitrage : Simple Trading to take advantage of Cryptocurrency Arbitrage among Exchanges and Currency Spreads’ ), I am here to write the part 2 to elaborate more.

Buy in US and Sell in Korea to make 10-20% within minutes!



Recent news on Korean crypto scene and Korea governments’ announcements show the clear demand in Korean market.

Today, Bithumb (Korean exchange) is showing one of the thinnest spread so far. (15~20%)

BTC/USD is at 14,600 with Bithumb and 11,725 with Bitstamp.

This type of arbitrage opportunity is quite clear and easy to identify.

Buy in US or Europe, then sell it in Korea to make 10-20% each time.
If you can compound like this, you will be the richest person in the world in 2018!

Korea is one of the many markets you can find this kind of opportunities in the Crypto world.

Why does this spread exist and is it really easy (or even possible) to do it?
I will like to go through these questions today.

Here’s how it can be done.

1. You are a resident in Korea. It means you are allowed to open an account with Bithumb.
2. You need to declare to open an offshore account and send money to your offshore account.
3. Continue to make money and pay good tax in Korea

 

Why does spread exist?

 

There were big debates in Korea among government agencies how to deal with Crypto.

One party was arguing ‘Kimchi Premium’ is from the pure speculation from the retail and that they will be the ones who will suffer in the end.

The other party was arguing that we need to look at opportunities of using the underlying technologies such as Blockchain. By limiting or banning Crypto itself will push the industry staying behind the global market players.

I agree with everyone but I don’t think that is the reason why ‘Kimchi Premium’ exists.

  • Yes. Bithumb is trading billions of dollars every day thanks to the retail market. It is a super speculative market. Customers are not fully protected legally.  (Crypto exchanges are handling bigger volume than Korean Stock Exchange now. 1 of every 3 employees are holding a Crypto trading account now)

 

  • Yes. This is one of rare opportunities where an Asian country is leading the technology behind it.  (I believe Asia is a good market place and has tech resources to bring Crypto related technologies to the next level)

But those are not reasons why Bitcoin is more expensive in Korea than US (or Europe).

It is from the inefficiency of the Korean Economic System.

Korea is a very interesting market. It is one of the top 10-15 markets by GDP in the world.

A leading player in Semiconductor as well as in many other sectors. Yet its finance industry is extremely under-developed.

One of good example will be…

‘When Korea was number 1 player in shipping, Korea was one of the worst players in financing the shipping industry’.

It just doesn’t make sense that Korea is not to as strong in ship financing when it is a leading shipping player.

The cost of the Korean Finance System is an extra 10-30% above global standard rates.

If the finance system itself is synced with the global system, this arbitrage opportunity will be wiped out by global hedge funds overnight.

It may cost 5-10% each time to remit funds into Korea and remit out, and not to forget the 20-30% tax and 10% VAT. (Simply bank wire transfer commission and FX spread for banks and tax will cost 10-30% easily)

 

Can we still make money?

 

Yes. Now we are back in the first place.

So… how can we build a system to make use of this opportunity in the places like Korea? What are the things we need to consider?

There are a couple of ways to do it and things to consider.

 

1. Automate

It is quite easy to see delays and downtime when you trade cryptocurrencies.

These days, having a mobile platform might be faster than using the Web. APIs will tend to be faster as well.

It is not as important to compare the speed of Ethereum to SWIFT. Over 90% of delays will stem from other issues. The exchanges are having hard time to deal with the traffic and demand. Even though Ethereum takes a minute to make transaction, exchanges and others will take 10-30 mins to a couple of hours to finish the transaction.

Moreover, if you transfer money to your crypto exchange account, the bank will take 2 (to 60) working days.

It is also not easy to deal with the extreme volatility in Crypto market.

 

2. Leverage

1-2% profit margin may look too small to retail traders.

If you can compound 1% a day for the whole year,

your return will be 37+ times every year! And 53,939 times in 3 years!

The way to make money is not having the bigger seed money but maximising the compounding effect.

Many exchanges offer leverage or perhaps you can find a way to do it.

If you can find a way to trade arbitrage opportunities with leverage, the outcome will be huge with pretty well managed risks.

 

3. Mitigate Risks

Of course, there are risks you need to deal with.

Counterparty risk is one of the main risks you want to manage properly.

See how many times popular crypto exchanges got hacked!

 

4. Transparency is the KEY

Don’t try too hard to maximize the profit or find the biggest opportunity.

While you may find the cheapest exchange to trade from, or even offered free trading, it still does not mean it is cheap to execute, especially when many exchanges are not taking orders in sequence.

The best way is to have transparent system for yourself and work with institutions with 100% transparency.

 

Conclusion

Arbitrage trading is one of the traditional trading strategies you can find in any asset classes. Crypto market is one of markets where you can find similar opportunities.

And there are a lot more interesting strategies you can apply.

Continue to do research and stay in the market not to miss it!