Crypto Carry

51 Pages Posted: 10 Dec 2022

See all articles by Maik Schmeling

Maik Schmeling

Goethe University Frankfurt - Department of Finance; Centre for Economic Policy Research (CEPR)

Andreas Schrimpf

CREATES - Aarhus University; Bank for International Settlements (BIS) - Monetary and Economic Department

Karamfil Todorov

Bank for International Settlements

Date Written: October 1, 2022

Abstract

We document that the carry of crypto futures, i.e., the difference between futures and spot prices, can become very large (up to 60% p.a.) and varies strongly over time. This behavior is most consistent with the existence of a highly volatile crypto convenience yield that stems from two main forces: (i) trend-chasing and attention by smaller investors seeking leveraged upside exposure to crypto assets in boom periods, and (ii) the relative scarcity of “arbitrage” capital taking the other side through a cash and carry position. Engaging in the latter is risky due to spikes in margins and liquidations amid drawdowns. The interplay between these two forces, and the involved high leverage, may help explain why severe market crashes are a frequent feature of crypto markets.

Keywords: Crypto, Carry, Futures basis, Crash risk, Bitcoin, Ethereum

JEL Classification: G12, G13, G15

Suggested Citation

Schmeling, Maik and Schrimpf, Andreas and Schrimpf, Andreas and Todorov, Karamfil, Crypto Carry (October 1, 2022). Available at SSRN: https://ssrn.com/abstract=4268371 or http://dx.doi.org/10.2139/ssrn.4268371

Maik Schmeling

Goethe University Frankfurt - Department of Finance ( email )

House of Finance
Theodor-W.-Adorno-Platz 3
Frankfurt am Main, Hessen 60323
Germany

HOME PAGE: http://sites.google.com/site/maikschmeling/

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

Andreas Schrimpf

CREATES - Aarhus University ( email )

School of Economics and Management
Building 1322, Bartholins Alle 10
DK-8000 Aarhus C
Denmark

Bank for International Settlements (BIS) - Monetary and Economic Department ( email )

Centralbahnplatz 2
CH-4002 Basel
Switzerland

Karamfil Todorov (Contact Author)

Bank for International Settlements ( email )

Centralbahnplatz 2
Basel, Basel-Stadt 4002
Switzerland

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