Panic selling post RBI ban opens door for cryptocurrency arbitrage

Amid the panic induced by the freezing of bank accounts run by cryptocurrency exchanges in line with the Reserve Bank of India’s (RBI’s) direction in April, traders in India found a lucrative arbitrage opportunity to mint money like never before. It all transpired on a cryptocurrency exchange platform Koinex, which had announced that it will not be accepting any more cash deposits in its digital wallet after July 6 and will not provide a cash-out facility for cryptocurrency holdings after 2pm on Monday. 

As the deadline approached, people sold their holdings in large enough volumes on Koinex that it resulted in a huge drop in prices for bitcoins, ethereum, and ripple, among other virtual currencies. For instance, on Koinex, bitcoin was trading at Rs 236,000, while ethereum cost Rs 15,500 per unit on Sunday. This is low compared to bitcoins being sold for about Rs 440,000 elsewhere, while ethereum units were retailing for more than Rs 31,300. 

A lot of traders were able to use this arbitrage opportunity because Koinex provided time till Monday for people to cash out their holdings even though the RBI ban was supposed to kick in from July 6. An industry insider said banks gave a couple of extra days to most bitcoin exchanges to allow investors to withdraw their money. 

As soon as messages about the arbitrage opportunity began to spread through various WhatsApp and Telegram groups constituting virtual currency traders and enthusiasts, people lapped up the opportunity. The only catch was that only those with cash in their Koinex wallets could make use of it since the company had disallowed fresh deposits. 

Even then, volumes jumped on the buy side by Sunday afternoon, showing investor interest in the arbitrage. As people bought coins on Koinex, they moved to other exchanges such as Coindelta and PocketBits to encash their holdings. A person with pseudonym Gabru, who runs one such group with over 4,000 members, said he oversaw some Rs 30 million worth of arbitrage trades happen even though there was no way to officially ascertain how much arbitrage had happened. 

“There was a lot of selling going on on Sunday, but the exact data is hard to produce as it is not publicly available. But from observation, around Rs 30 million worth of crypto was bought at really cheap prices,” he said. The person added that anyone who successfully executed the trade on Sunday would have got their cash by Monday. 

Four people from Delhi and Pune confirmed they took benefit of this opportunity even as they refused to disclose their identities or holdings to Business Standard due to regulatory uncertainty around cryptocurrencies. 

“The opportunity was too good to be true. 

I used up all my deposits in the account to buy a couple of currencies and got good prices on other platforms which are still allowing buying and selling but one does not know for how long,” said a 28-year-old engineer from Delhi, who claimed to have made use of the arbitrage. 

It was in April that the RBI gave banks three months to end all business relationships with any companies trading or working with virtual currencies of any kind, citing risks such as consumer protection, market integrity, and money laundering.

Nishchal Shetty, founder of cryptocurrency exchange WazirX, said prices remained stable on their platform as it had moved to the peer-to-peer (P2P) model even though arbitrage opportunities always existed in the market due to the non-involvement of algorithms which can erode any such price differential.

“There is always arbitrage opportunity in the Indian cryptocurrency space due to the volatility of various cryptos. In mature markets, automated systems grab arbitrage opportunities but since the crypto space in India is relatively new, there are no automated systems grabbing these arbitrage opportunities. Due to this, people get the opportunity to arbitrage,” Shetty said. 

Even as the RBI circular put the business of exchanges in danger in one fell swoop, industry approached the Supreme Court for a hearing to get a stay on the order which the apex court had dismissed last week. 

However, cryptocurrency exchanges have not stopped functioning and have figured out a P2P model which does not require intermediation by banks as cryptocurrencies can either be exchanged for other currencies or encashed by routing through international exchanges. 

Koinex did not respond to Business Standard’s queries till the time of going to press.