The crypto carry trade

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The combination of stablecoins and yield farming – a way to earn interest on crypto assets – means there are now high-yield currencies that claim no risk of depreciation against the US dollar. The material exists for a huge carry trade.

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big picture: The carry trade is the lifeblood of the FX markets. You borrow cheaply in one currency, invest in another at a higher interest rate, and as long as your funding currency doesn’t depreciate too rapidly against your target currency, you can easily make money.

how it works: coinbase issued Bonds worth $2 billion this week pay 3.375% on seven-year tranches and 3.625% for 10-years.

  • Pricing was expensive by US corporate bond standards, and also expensive by junk-bond standards: Coinbase paid about 0.65 points more than most other companies with similar BB+ credit ratings. But by crypto standards, the funding was cheap.
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By numbers: Coinbase in June promised To pay a 4% return on USDC, the dollar-denominated stablecoin with which it is pegged. Other companies pay much more: BlockFi, for example, pays as much 8% interest On USDC, which is roughly Gemini pays On your Gemini Dollar.

Between the lines: People borrowing dollar-denominated coins at 8% are doing so because the traditional banking system is still very uncomfortable lending against crypto assets. (All crypto lending is over-collateralized and set up with automatic margin calls; according to the lenders, which makes it very safe and minimizes any credit risk.)

  • For players using fiat Lending markets like Coinbase, which sets up a very simple carry trade: borrow US dollars, lend USD stablecoins, and earn free money on the spread between the two.
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Be smart: There is no such thing as a free lunch. This kind of trading involves all kinds of risk, and there’s really no indication that Coinbase is going to lend its dollars in the form of USDC, instead putting them for any alternative corporate use. .

Bottom-line: The spread between USD and USDC yields is incredibly large at the moment. If that spread starts to decrease, it would be a good sign that crypto is succeeding in maturing as an asset class.

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