Sep 16, 2021 - Economy

The crypto carry trade

Illustration of a percentage sign pointing up.

Illustration: Sarah Grillo/Axios

The combination of stablecoins and yield farming — a way to earn interest on crypto assets — means that there are now high-yielding currencies that claim to have no risk of depreciating against the U.S. dollar. The ingredients for an enormous carry trade are in place.

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

How it works: Coinbase issued $2 billion of dollar bonds this week, paying 3.375% on the seven-year tranche and 3.625% for the 10-year.

  • The pricing was expensive by U.S. corporate bond standards, and even expensive by junk-bond standards: Coinbase ended up paying about 0.65 points more than most other companies carrying the same BB+ credit rating. But by crypto standards, the funding was dirt cheap.

By the numbers: Coinbase in June promised to pay a 4% yield on USDC, the dollar-linked stablecoin it's associated with. Other companies pay much more: BlockFi, for instance, pays as much as 8% interest on USDC, which is roughly what Gemini pays on its Gemini dollar.

Between the lines: The people borrowing dollar-proxy 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, that makes it very safe and minimizes any credit risk.)

  • For players with access to fiat borrowing markets, such as Coinbase, that sets up a very simple carry trade: Borrow U.S. dollars, lend USD stablecoins, and make free money on the spread between the two.

Be smart: There's no such thing as a free lunch. There are all manner of risks involved in such a trade, and in fact there's no indication that Coinbase is going to lend its dollars out in the form of USDC, rather than putting them to any number of alternative corporate uses.

The bottom line: The spread between USD and USDC yields is incredibly large at the moment. If that spread starts to narrow, that'll be a good sign crypto is succeeding in maturing as an asset class.

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