Researchers looking at the “crypto carry” rate between spot and futures markets and its causes came to conclusions about crypto market booms and busts and how they happen.
The Bank for International Settlements (BIS) has released a working-out paper examining “ crypto carry ” — the differences between Bitcoin BTC $28,047 and Ether ETH $1,878 spot and futures prices and their effect on crypto investment markets. The complex paper sheds light on the behavior of crypto investors, especially lower investors, in relation to boom and bust cycles.
“ Carry ” describes the results of “ going long in the spot market, while selling the equal amount forward via a futures contract. ” The paper bases its findings on “ stylized data ” based on various exchanges over time.
Very little of the carry size — about 3 — resulted from differences between interest rates on crypto and fiat or variations among exchanges, which may be crypto-native. The major factor was 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.”
Rising crypto carry was found, based on the evidence of traders on the CME, to be associated with “ an upgrade in net long positions by ‘ nonreportable ’ traders, ” similar to “ family offices, proprietary trading shops that run commodity trend-following strategies, and/or wealthy individuals. ”
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Those buyers take levered futures positions “ when there are strong price trends and heightened media attention. ” Sellers experience threats from price volatility at the same time, the argument continued, making capital on the sell side “ scarce and slow-moving.”
This situation has notable consequences, including causing a high carry rate. moreover, “ The interplay between these forces […] elp[s] explain why severe price run-ups and market crashes are a frequent feature of crypto markets, ” the authors wrote. Therefore, the size of crypto carry can partly predict market crashes because of its correlation with convenience yield. In traditional markets, convenience yield describes the premium of holding an underlying asset rather than its derivative. The authors wrote
“One of the most salient features of crypto markets over the past years, namely rapid price booms followed by large busts, seem to be linked to the drivers of the crypto convenience yields.”
(DEREK ANDERSEN, Cointelegraph, 2023)