Recently, Skew published a study that seems to indicate that institutional demand for Stablecoins may fall if traders abandon the „Cash and Carry“ strategy. Find out what it’s about here.

The institutional demand for stablecoins had grown considerably recently. However, since trading performance has been reduced with the carry arbitrage strategy, or „carry trade“, there is a risk that demand for stablecoins will also decrease.

Tether, the stablecoin that keeps growing

Data on institutional demand for stablecoins
The annual futures base shot up to 28% at the start of the week on OKEx. That was the highest premium since February, according to data provided by the cryptographic derivatives research firm Skew.

However, that premium dropped to 14% in less than 48 hours. In other words, the carry strategy, if started now and held until next Friday, will produce an annualized return of 14%, down from Monday’s 28%.

Carry trade, or cash and carry arbitrage, is a neutral market strategy. This strategy seeks to benefit from both Cryoto Engine increasing and decreasing prices in one or more markets. It involves buying the asset in the spot market and simultaneously selling a futures contract against it when the futures contract is priced at a premium to the spot price.

However, the premium evaporates as the futures contract approaches maturity and the day of settlement. In these cases the futures price converges with the spot price. In the event that futures generate high premiums, experienced traders initiate a carry strategy and secure fixed returns.

This type of strategy can be applied to several assets, impacting different markets at the same time, as is the case between Bitcoin and stablecoins.

What are the risks of making loans with crypto-currencies?

The futures markets and how they work
Futures markets generally trade at a premium to the spot market and the spread tends to widen during price rallies. The annualized premium increased from approximately 9% to 27% in the last two weeks of July. This is because the price of Bitcoin rose from $9,000 to $12,000 and remained close to that level until August.

Traders could have secured a 28% annualized profit on Monday by buying BTC on the spot market and selling the first month’s futures contract on OKEx. Making that trade now would still generate profits, but only half as much.

How does all this relate to stablecoins?

The decline in the performance of the carry strategy could also mean a drop in demand for stablecoins. It can especially affect dollar-backed stablecoins, such as Tether (USDT).

The problem is that these are often used as funding currencies, and so institutional demand for them has grown. In fact, carry trade has been one of the main reasons for the increase in the issuance of stablecoins in 2020, according to CoinDesk.

Zuletzt bearbeitet: 23. August 2020

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