Risks and Liability

This section is about all of the risks and perceived risks involved with this process and who assumes liability for these risks.

Foreign Exchange Risk

The biggest risk by far is the exposure to foreign exchange rate volatility. The reason this risk exists is due to the timing difference between sending funds from your foreign exchange holding account and receiving them in the International Exchange (normally 1 business day). This risk is specifically the ZAR strengthening over this period, whereas weakening of the ZAR would result in increased profit. 

Example 1: The arbitrage rate is a steady 3% for the entire Orbit. You send your funds out of the country using USD at a rate of R15.00. By the time it arrives at the exchange the following day, ZAR has now strengthened by 1% to R14.85. 

In this scenario, you would be worse-off because your effective FX rate is still at R15.00, but the bitcoin markets are trading at the live rate of R14.85, the arbitrage rate is still 3% based on current FX rates, but is 2% for your effective rate.

Example 2: The arbitrage rate is a steady 3% for the entire Orbit. You send your funds out of the country using USD at a rate of R15.00. This time when it arrives at the exchange the following day, ZAR has now weakened by 1% to R15.15. 

In this scenario, you would be better off because your effective FX rate is still at R15.00, but the bitcoin markets are trading at the live rate of R15.15, the arbitrage rate is still 3% based on current FX rates, but now is 4% for your effective rate.

Luckily, ZAR typically and historically weakens faster than it strengthens, so this risk is somewhat mitigated. The issue comes in when there’s a delay in the transfer where you might be exposed to a longer transfer time and therefore higher risk. 

Normally the arbitrage rate lags behind this, so even when the ZAR suddenly strengthens, the arbitrage rate takes a day to adjust (so is artificially higher for a while), but this paired with the arbitrage rate risk can make for a dangerous combination which could result in a minimal potential loss.

This is obviously something that Lumina cannot control, so we cannot accept liability for this.

Cryptocurrency Exchange Risk

Bitcoin exchanges in the past have had a somewhat less-than-perfect track record. They do occasionally get hacked and users funds are stolen or go bankrupt (see Mt. Gox and Quadriga). The exchanges we use (Kraken, VALR, and Luno which have good reputations) have had no incidents to date and boast some of the highest security measures across the industry. In reality, exchanges shutting down or being hacked aren’t very likely outcomes, and it should be considered as safe as keeping funds with an online banking presence. 

This risk is massively mitigated by Lumina processing your funds as soon as they arrive. The shorter your funds are in any exchange, the safer they are, and on average they shouldn’t be in any one exchange for more than 1 business day at most. 

In the extremely unlikely event of any issues with the exchanges, you’d likely have recourse in terms of insolvency claims against the exchanges (similar to what happened with Mt. Gox). The exchanges we use are regulated and backed by major investor companies.

This is also something that sits outside of Lumina’s control, so we cannot accept liability for this.

Bitcoin Price Risk

Bitcoin is known to be an extremely volatile asset. Lumina’s arbitrage setup is designed to eradicate your exposure to the price of Bitcoin. We hedge against all movements, so you will not be affected by any price movements of BTC.

Lumina is liable for and manages this risk.

Arbitrage Rate Risk

The arbitrage rate fluctuates quite actively too, which does result in a risk associated with this movement. You could send your funds when the arbitrage rate is 5%, and by the time they land it could have moved down to 3%. In the worst case, you’d be looking at making worse returns. This coupled with the FX rate risk could potentially create the perfect storm for a loss.

This is normal market behaviour, and Lumina cannot control this. However, we are looking into ways to hedge against this risk.

Lumina’s Processing Risk

This process is stable and has proven itself to be reliable and accurate over several years. If there’s any issue caused by Lumina’s proprietary software and the processing of the arbitrage trades, Lumina will cover this in full.

Lumina will cover all losses derived from any of our processing errors.