Fiat-to-Crypto ‘Carry Trade’ May Tempt Traders Tired of Negative Interest Rates

With the era of negative interest rates well and truly here, return-hungry investors may increasingly borrow in low-interest fiat currencies and invest in higher-yielding cryptocurrency accounts.

“The fiat-BTC carry trade is the next step in bitcoin growth,” tweeted popular bitcoin quant investor @100trillionUSD on Oct. 10.

A carry trade is a strategy where a trader uses a low-yielding currency to fund a high-yielding investment.

For instance, the yen carry trade was popular in 2004-2008 when the Federal Reserve hiked rates from 1 percent to 5.25 percent and interest rates in Japan were stuck near 0.5 percent.

Investors borrowed in yen to fund dollar-denominated investments. As a result, the yen weakened by 20 percent against the U.S. dollar.

Currently, the carry trade in the FX markets is pretty much dead with almost every advanced nation having interest rates at or below zero.

But that situation bodes well for a new type of carry trade with a crypto twist.

Lucrative lending…

On the lending side, crypto-asset platforms like Binance, Crypto.com, Celsius Network, BlockFi are paying interest rates on cryptocurrency deposits. They fund this with interest earned from credit lines extended to margin traders and hedgers.

The interest rates are subject to fluctuations, either modified by the platform operator or influenced by the supply-demand mechanics of users interacting with the platform.

For instance, the Bitfinex exchange pays an annual interest rate of 0.66 percent interest on bitcoin deposits and provides loans at 0.59 percent, according to CoinMarketCap’s new Interest tracker.

In a sense, Bitfinex is operating as a commercial bank by charging a higher rate on loans and paying relatively less on deposits. (Think of the old 3-6-3 rule: “borrow at 3 percent, lend at 6 percent, hit the golf course at 3” – except unlike a bank, crypto exchanges never close.)

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