From September 2017 all the way up to the first two months of 2018, the Asian bitcoin arbitrage market was booming. With China banning ICOs and online trading platforms and South Korea initially taking a hard stance on crypto, the market had no choice but to go underground.
As a result, bitcoin trading could be carried out in an environment far removed from the watchful of the government and financial regulators. The move underground led to the emergence of varied buying and selling rates as a traditionally unregulated market became even more unregulated.
The Rise of the Mules, OTC, and P2P Platforms
Many Chinese residents with no access to online bitcoin trading platforms have had to resort to bitcoin mules, other-the-counter (OTC) and peer-to-peer (P2P) platforms. As the price of bitcoin began to soar astronomically during the latter part of 2017, the demand for bitcoin became even more frenzied as these underground trading platforms began to charge large premiums to sell bitcoin to desperate investors looking to make overnight gains.
At the height of the arbitrage market boom, investors were willing to pay up to a 30 percent premium in order to buy bitcoin. These mules, OTC and P2P platforms took advantage of the situation making huge profits.
According to Reuters, Chinese cryptocurrency platforms unable to operate in the country began to create P2P and OTC platforms where Chinese residents could purchase bitcoin. According to Christian Grewell, a business professor at NYU in Shanghai, many bitcoin traders in China make use of CoinCola, an OTC platform created by Huobi and OKCoin, two Chinese cryptocurrency exchange platforms. Some traders would even make the trip to other countries with wads of cash, in order to buy bitcoin and return to China and sell on a P2P basis to willing buyers.
In no time, institutional investors such as hedge funds made their way onto the scene causing the market to become saturated. This has caused a significant downturn in the market, according to John DeCleene, an assistant fund manager at Overseas Chinese Investment Management. According to DeCleene, the mass entry of institutional investors and a decline in the hype surrounding bitcoin has contributed to the current downward movement of the profits in the Asian bitcoin arbitrage market. Despite this, DeCleene is positive that profits are still being made especially by hedge funds who can execute trades swiftly thereby taking advantage of arbitrage opportunities.
Speaking on the issue, Peter Kim, the manager of a $10 million crypto arbitrage operation says that at the height of the hype, there was a 30 percent arbitrage. He went to say that the arbitrage percentage has reduced considerably but it is still a lot larger than can be obtained for conventional assets.
Even on much smaller spreads, hedge funds are still reportedly making a decent profit while the smaller traders are finding it a lot more difficult to compete in the market. With price decline currently affecting bitcoin, much of the arbitrage attention is being shifted to Tether, which trades at an approximate two to three percent premium in China. Nevertheless, the easy arbitrage opportunities are going to be much less frequent.