The Loop Methodology for Bitcoin Arbitrage

This article covers the basic introduction to the cryptocurrency arbitrage and its profits. It describes an arbitrage strategy that is commonly referred to as “The Loop”.

What is cryptocurrency arbitrage?

In the previous section, we defined a Bitcoin (or crypto-currency) arbitrage as the practice of taking advantage of the price difference of Bitcoin (or any other crypto asset) that occurs between two crypto exchanges.
The idea is to buy cheap on exchange A, transfer to exchange B where you can sell for more.

The learning curve

The first time I noticed that I could buy Bitcoin cheaper on Xapo/Binance/Coinbase than on Luno , I typically followed the Loop strategy, and discovered several pitfalls.

Back when Bitcoin was trading at $14000 (before the December 2018 crash), these opportunities were abundant. The process was simple (I was living in South Africa at the time, so simple is a relative term)

Step 1. Wait for the price at Luno to exceed the price at Xapo

Step 2. Buy Bitoin at Xapo (because in SA that was pretty much the only option at the time – South Africans are subject to strict exchange control regulation)

Step 3. Send Bitcoin to Luno from Xapo

Step 4. Sell Bitcoin at Luno

Step 5. Withdraw funds from Luno

Repeat.

This process quickly turned into a nightmare, for the following reasons:

  1. The transaction fees at Xapo PLUS the unfavourable forex rate converting ZAR into U$D
  2. Time taken to convert U$D into BTC at Xapo
  3. Time delays on blockchain – by the time the BTC arrived at Luno, the price had changed
  4. Withdrawal fees at Luno
  5. Time taken to get funds back into Bank account to restart the process
  6. Credit card company started asking uncomfortable questions
The Loop methodology for Bitcoin Arbitrage

The Costs

The cost of performing this arbitrage are fairly substantial and include:

  1. An x% exchange charge for using your card
  2. A card processing transaction cost
  3. An unfavourable exchange rate
  4. A fee for transferring your currency into BTC
  5. A Blockchain fee for transferring BTC to the exchange on which you plan to sell
  6. A receiving fee for receiving BTC at receiving exchange
  7. A fee for exchanging BTC to local currency
  8. A withdrawal fee

By the time you are finished with the fees, the margin remaining might not be worth the risk and effort. 

Time Taken

The process can take a few days, depending where you reside – the primary delay in SA being getting your cash out of Luno and back into your credit card. This leaves you with the limited opportunity of only being able to trade a few times per month.

The Legalities (Not applicable to most countries)

The money leaving your credit card will have to form part of your discretionary allowance. (South Africa)

What is a single discretionary allowance? (@ the non-South Africans – do not chuckle, this is reality)
It is an allowance within an overall limit of R1 million per calendar year which a South African resident over the age of 18 years may avail of. Of course, this puts the brakes on arbitrage for South Africans – or does it?

There had to be a better way. Through much experimentation, trial and error, and many hours of trading, we believe we found the answer that eliminates all the downsides. We call it the Oscillating Arbitrage.

The Oscillating arbitrage negates all the downsides of the loop:

  • Cost – 0.175%
  • Time – Instant
  • Trade opportunities – at least 2 a day
  • Legalities – no contravention of any laws and not contravening the SA exchange control laws