The current international monetary environment is characterized by ultra-expansionary monetary policies undertaken by the main central banks: Federal Reserve, European Central Bank, Bank of Japan, Bank of England. Among the many decisions made by central bankers to ease the monetary stance are those of zeroing interest rates (in some cases interest rates have been brought to negative levels) and policies known as “quantitative easing”. In this money market environment, cryptocurrency traders have reacted by developing a new trading strategy to ensure high returns.
The crypto carry trade is a strategy where traders exploit fiat currencies which offer low interest rates to invest in savings accounts in high yield cryptocurrencies. The carry trade strategy of cryptocurrencies is therefore completely analogous to a typical carry trade strategy, which involves the use of a low yield currency to finance an investment in a high yield currency. A strategy that has always offered satisfactory results.
A typical example of a carry trade exploiting fiat currencies is that which took place in the second half of the 2000s, when interest rates in Japan had fallen steadily close to 0.5% while those of the United States had risen from 1% to 5.25%. What did the traders do? They borrowed the yen to finance their dollar-denominated investments. As the yen weakened by -20.0% against the dollar, carry traders made a profit. Following the alignment of interest rates globally by central banks, the carry trade had lost its popularity in recent years. Today, it is finding new momentum thanks to cryptocurrencies. With interest rates at all-time lows, cryptocurrency traders have launched the crypto carry trade. At least in theory, lower interest rates offered by traditional fiat currencies generate more incentives for traders to buy risk assets, less incentives to passively hold fiat currencies and greater incentive to deposit money in high-yielding crypto savings accounts.