The Bank for International Settlements (BIS) has produced a working paper exploring “crypto carry” — the differential in spot and futures prices between Bitcoin $28,028 and Ethereum $1,878 — and its impact on crypto investment markets. The intricate article offers insight on the behavior of cryptocurrency investors, particularly smaller investors, in connection to boom and bust cycles.
The term “carry” refers to the outcome of “going long in the spot market while selling the same amount forward via a futures contract.” The paper’s conclusions are based on “stylized facts” gleaned through a range of interactions over time.
Only around 3% of the carry size was caused by disparities in interest rates between crypto and fiat, or by discrepancies across exchanges, which may be crypto-native, like Binance and OKX, or regulated, like the Chicago Mercantile Exchange. (CME). The convenience yield of holding futures was the most important factor: “Crypto carry is large (up to 60% p.a.), strongly time-varying, and 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.”
Rising crypto carry was shown to be related 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,” based on information from CME traders.
Leveraged futures positions are taken by these purchasers “when there are strong price trends and increased media attention.” At the same time, sellers face dangers from price volatility, according to the theory, making capital on the sell side “scarce and slow-moving.”
This condition has significant effects, including a high carry rate. Furthermore, the scientists claimed that “the interplay between these forces […] explains why severe price run-ups and market crashes are a frequent feature of crypto markets.” As a result of its relationship with convenience yield, the magnitude of crypto carry can help anticipate market collapses. In conventional markets, convenience yield refers to the premium associated with owning an underlying asset rather than its derivative. “One of the most salient features of crypto markets over the past years, namely rapid price booms followed by large busts, appear to be linked to the drivers of the crypto convenience yields,” the scientists stated.
