Many people often ask why the LUNO price we provide for Bitcoin in ZAR on our crypto page, our spots on our mobile app and our spots page does not translate to the $ price when converted using the prevailing R/$ exchange rate.
This is because the ZAR price, taken from LUNO is reflective of the supply/demand situation in South Africa. Buyers of Bitcoin on LUNO have to purchase from local sellers on LUNO and vice versa. The global supply of Bitcoins is limited, with only 1,800 new Bitcoins minted per day. When the local demand outstrips local supply, the local price has to rise to coax holders to part with their Bitcoins. And as we have shown previously, South Africans don’t want to part with their Bitcoin. Thus, the local price of Bitcoin in ZAR can trade up to a 35% premium to the global Dollar average taken from all major exchanges. This price deviation is called an arbitrage (“arb” for short) as shown below
This high arbitrage phenomenon is prevalent in many emerging economies with limited choice of high-liquidity Bitcoin exchanges, stricter exchange controls or where access to international bank accounts is limited. Since the local supply is restricted, the arbitrage is much more sensitive to or reflective of investor euphoria which makes arbitrage a great measure of sentiment.
This can provide for some great arbitrage trading opportunities, where one has dollars on an exchange offshore and Bitcoin on LUNO, one can buy the cheap Bitcoin in dollars offshore and sell them on Luno for a higher price and guaranteed profit. We normally pencil in at least 5% “friction” on the trade to cover slippage, transaction costs etc, which means arbitration needs to be at least above 10% to make it worthwhile.
But we find this arbitrage much more useful in reflecting local sentiment. The higher the arbitrage, the higher the local South African bullish sentiment or “animal spirits”. Conversely, the lower the arbitrage, the higher the bearish sentiment. If you look at the above chart you can see that instances where the arbitrage was lower than 2.5% (green dotted line showing very bearish sentiment) almost always preceded large rallies in Bitcoin. Similarly, when the arbitrage expanded to above 12.5% (red dotted line showing very bullish sentiment) the price of Bitcoin normally corrected shortly after.
More recently the arbitrage expanded to 14% (we saw 17% intraday) and Bitcoin put in a top almost immediately thereafter. The lesson here is the same as with stock market assets. Buy assets when they are cheap. It does not make sense buying Bitcoin at a 15-20% premium to global prices
Now we didn’t need a high local arbitrage to warn us of a major top in Bitcoin. The Bitcoin Difficulty/Price ratio (Mining difficulty divided by Bitcoin price) extended beyond negative two standard deviations, which is normally a major top warning. You can read more about how this works over here
Despite an impending non-trivial correction of 10-40% ahead of us, we are still longer-term bullish on Bitcoin. Here is an update of our Bitcoin 2017 price regression forecasts:
The above of course assumes continued mass adoption of Bitcoin toward the end of the year and no hard fork complications or jumping ship to Bitcoin Cash. Also, the forecast lines are by no means indicative of how smoothly we will get to indicated objectives.
Dwaine van Vuuren
RecessionAlert, Sharenet Analytics
Dwaine van Vuuren is a full-time trader, global investor and stock-market researcher. His passion for numbers and keen research & analytic ability has helped grow RecessionALERT.com (US based) and PowerStocks Research (now Sharenet Analytics) into companies used by hundreds of hedge funds, brokerage firms, financial advisers and private investors around the world. An enthusiastic educator, he will have you trading and investing with confidence & discipline.