Thread by @IDrawCharts

who wants to hear about carry trades

ok if you don't, gfy

since we have the whole stablecoin thing coming up tomorrow (good or bad), did u know you can basically get synthetic USD on any exchange that lets you collateralize your positions in non-stables?

how it works

you're holding ETH, for example

but you want to hold USD instead

You could sell your eth for... idk, let's say it's trading @ 2k

but wait

the ETH december futures on FTX are trading at (example) $2100

so instead of selling your ETH, you just short the December futures for 2100

you have (example) 10 eth, worth 20k

and now you have a short position of 10 eth, worth 21k

But!

when that contract expires, it'll expire to the same price as spot ETH

well, since buyers are over-paying for their ETH futures by $100/eth, you sold it to them

you essentially sold your spot eth for $100 more than the market value

now all you have to do is hold your spot ETH and your short futures position until that future expires in december

and you'll make the difference (in this case, $100 per ETH, or 1k in total)

so great! It's a good trade, you're making 5%! but that can't be realistic, right?

Well, a few months ago, the ETH December futures were trading at a 22%!!!! premium to ETH spot

So uh, yeah. It's real

So why talk about this now?

well, premiums rn are low. The market isn't pricing in a bunch of upside, unlike earlier this year.

Those premiums exist because people buying are essentially betting that the premium is less than perp funding would cost over the same time period

So in a very real way, both futures premiums and perp funding are the cost of leverage: how much are you willing to pay to gain exposure to something you don't own?

These two can actually be their own form of arbitrage/carry trade.

If you think the premiums are unsustainable high, instead of buying ETH and selling futures (which costs the spot eth, which is then used as margin), you could buy perps and sell futures.

This has a lower capital cost (you can lever up kinda high, since the two will mostly offset each other, I'd recommend no higher than 10x MAX tho), but you are capturing a smaller spread because you're paying the funding rate.

most people don't take this trade right now.

It's just not the most efficient use of capital, because you could just take the traditional carry trade (futures against spot)

But I expect that to change if we get a stablecoin crackdown.

Because think about it. If you own stables right now, it's easy USD exposure. There's nothing more to it.

But imagine that goes away.

Now you gotta find another USD equivalent. What's that?

Right. Carry trade.

But when any trade gets crowded, returns get smaller

so the futures vs spot trade won't yield nearly as much any more if everybody's taking it during risk-off environments.

So assuming the worst, and that this happens, what's the move?

Well, you can arb the perp funding as mentioned before.

That ought to be a good trade for... well, honestly quite a while. But it's low-return.

The other option is lending rate arbitrage.

Right now, the differences in lending rates are staggering. I can take out a loan from a hundred different protocols, all at different interest rates.

Then I can move that coin to another protocol (or CEX, like bittrex or FTX!) and lend it out for a higher %

Now, this one is weird because the collateral often is measured in USD, which as we mentioned, might be hard to come by if stables are effectively rekt, or maybe you just don't want the exposure

There are a few ways to work around this, but they're all pretty complex (think on-chain options, multiple-way correlation arbs, etc) and I've only actually tried one of them personally.

But that's changing.

DAI is (afaik, somebody correct me) the oldest functioning collateralized stablecoin rn

it can be used, but has its flaws

additional solutions are popping up on eth, polygon, bsc, solana, etc every day

we're *THIS* close to not NEEDING to rely on centralized stablecoins.

the biggest problem is off ramps.

@AndreCronjeTech is working on a decentralized on/off ramp.

I'm not sure I'm understanding him on it, but I've put a lot of thought into how to create something similar.

I believe it's possible, as does he (obviously, and he's way smarter)

we're pretty close

defi is close to being unkillable

IPFS front-ends, decentralized access to centralized necessities, anon teams building wall-street class financial products and services that anyone can access from anywhere in the world

So how does this all relate to carry trades?

Now that you know what they are, watch how much they pay.

30% annually is pretty normal (in crypto, elsewhere that'd be ludicrous)

I think the crypto carry trade is the canary in the coal mine for stablecoins.

If those carry yields start to drop, you're gonna need a plan.

How are you going to measure your portfolio? Will you stay in crypto? Gonna switch to DAI denomination?

For some of you, you might either get stuck holding some kind of spot coin, or have to get out

All of this is doom and gloom, worst-case-scenario-for-all-stablecoins stuff

but that's what I do

identify and manage risks, regardless how small

So watch the carry trade yield, watch the health of the stablecoin market, have a plan if it falls out from under you.

Hope you learned something or at least thought of something new

Gl, hf, sp, gfy

also, shoutout to @skynetcap

I don't remember exactly what he said but he reminded me of carry trades

which reminded me that I was gonna write this thread like 12 hours ago

so yeah

sometimes I get distracted