The Bank for International Settlements (BIS) has published a working paper that delves into the concept of “crypto carry” and its impact on crypto investment markets. Specifically, the report examines the differences between Bitcoin (BTC) and Ether (ETH) spot and futures prices and sheds light on the behavior of small investors during boom and bust cycles.
The term “carry” refers to “going long in the spot market, while selling forward the same amount forward via a futures contract.” The paper drew its findings from “stylized facts” derived from various exchanges over time.
The report discovered that the majority of the carry size, about 3%, was not down to interest rates on crypto and fiat, or variations among exchanges (whether crypto-native or regulated like the Chicago Mercantile Exchange (CME)). Rather, it was due to the convenience yield of holding futures:
“Crypto carry is large (up to 60% p.a.), strongly time-varying, and is most compatible with the existence of a highly volatile crypto futures convenience yield, i.e. investors are willing to pay more for the convenience of a levered futures contract relative to buying spot crypto.”
The report found that the rising crypto carry rate could be associated with “a rise in net long positions by ‘nonreportable’ traders,” such as “family offices, proprietary trading shops that run commodity trend-following strategies and/or wealthy individuals.”
Smaller leveraged investors who chase trends and the relative scarcity of arbitrage capital are the two main reasons for the large “crypto carry” of up to 60% in Bitcoin and Ethereum. The interplay between these forces helps explain why severe price run-ups and market crashes are a frequent feature of crypto markets.
According to the report, the size of crypto carry can partly predict market crashes, given its correlation with convenience yield. Traditionally, convenience yield describes the premium of holding an underlying asset rather than its derivative.
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