The Bank for International Settlements (BIS) has published a working paper examining “crypto carry” — the differences between spot and futures prices of bitcoin (BTC) and ether (ETH) — and its impact on crypto investment markets. The complex paper sheds light on the behavior of crypto investors, especially smaller investors, in relation to boom and bust cycles.
“Carry” describes the results of “being long in the spot market while selling the same amount forward through a futures contract.” The paper bases its findings on “stylized facts” based on a variety of exchanges over time.
Very little of the carry size – around 3% – resulted from differences between interest rates for crypto and fiat, or fluctuations between exchanges, which may be crypto-native, like Binance and OKX, or regulated, like the Chicago Mercantile Exchange (CME) . The main factor was the convenience return of holding futures:
“Crypto carry is large (up to 60% pa), highly time-varying, and most consistent with the existence of a highly volatile crypto futures convenience yield, meaning investors are willing to pay more for the convenience of a leveraged futures contract to buy spot crypto.”
Based on what traders reported on the CME, rising crypto carry was found to be associated with “an increase in net long positions by ‘non-reportable’ traders, such as , and/or wealthy individuals.”
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These buyers take leveraged futures positions “when there are strong price trends and heightened media attention.” At the same time, sellers are exposed to risks from price volatility, it said, which means that capital on the seller’s side is “scarce and difficult to move”.
This situation has notable consequences, including causing a high carry rate. Also: “The interplay of these forces […] help[s] explain why severe price surges and market crashes are a common feature of crypto markets,” the authors wrote. Therefore, crypto carry size can partially predict market crashes due to its correlation with convenience yield. In traditional markets, convenience yield describes the premium for holding an underlying asset instead of its derivative. The authors wrote:
“One of the most salient features of crypto markets over the past several years, namely rapid price booms followed by large collapses, appears to be tied to the drivers of crypto convenience returns.”
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