Concept

Crypto carry is the application of cash and carry strategy on crypto assets (e.g., cryptocurrency such as Bitcoin or Ether). In other words, it involves going long in the spot market (as to a crypto), while selling short in the futures contract. The carry reflects the difference between a coin’s spot price and futures price. Given the nature of cryptocurrencies (i.e., their use as currencies with the main features of money), crypto carry (also, futures basis) generally exhibits characteristics partly similar to currencies. But also given their distinct features as a standalone asset class, crypto carry also behaves partly similar to commodities, rationalized by the process of creation and staking.

Effect of staking

Staking is the process whereby network participants can earn rewards (or returns) by locking their cryptoassets and other digital assets in wallets. Decentralized finance (DeFi) applications and protocols require a certain level of liquidity to ensure transactions are carried out in a smooth and efficient manner. As a distinct asset class, crypto assets are increasingly staked, and nowadays provide an attractive means to earn passive investment income on such assets, whether individually or as part of an investment scheme. While staking is in process, the staked assets get restricted- that is, they cannot be disposed of or traded freely. Staking allows the asset owner (or its representative) to participate in validating transactions and to earn staking rewards in the form of newly minted tokens.

Market observation

Due to the hybrid nature of crypto, crypto carry is wider than the carry of other asset classes such as equities, fixed income, currencies and commodities. As inferred from the dynamics of crypto futures, this asset class exhibits certain performance features similar to classes such as precious metals (as inferred from the dynamics of futures on precious metals). In carry trades, fluctuations in convenience yields drive variation in carry. In crypto markets, this can be attributed to trend-chasing and interest shown by smaller investors seeking leveraged upside exposure to crypto assets in bull markets, and and also the relative scarcity of “arbitrage” funds that flip to the other side of trading through a cash and carry position.