A carry trade or “carry trading’ is a unique trading strategy where one takes a loan at a low-interest rate and then takes that loan to invest in an asset that provides a significantly higher rate of return. It’s a strategy that has been used in traditional markets for many years between various fiat currencies but lately, many cryptocurrency enthusiasts are using this same strategy with a twist. It’s time to introduce yourself to the crypto carry trade.
The crypto carry trade: A product of low-interest rates at banks
Before we start diving into the specific of the crypto carry trade, let’s first examine how this strategy made such an efficient transition from traditional markets to digital ones. The culprit here is our beloved central banks.
Central banks all over the world are lowering interest rates in an effort to incentivize investors to buy more assets, stop them from “passively holding” fiat in banks, and in turn, stimulate the economy. Whether this is an effective economic strategy is up for debate and could be the topic of a whole new article. However, the point here is that with low-interest rates (and in some cases, even negative interest rates in Europe), traders started getting creative with how to let these low rates work in their favor.
How does the traditional carry trade work?
Let’s pause for a second with a small history lesson to help us better understand the carry trade strategy. Between the years 2004 – 2008, interest rates at Japanese banks were around 0.5%. During the same period, The Federal Reserve in the USA hiked up rates from 1% to 5.25%.
As a result, investors started to borrow Japanese yen and invest that in the dollar. The combination of the higher interest rates in the USA and the yen weakening 20% against the dollar resulted in some large profits for investors. Today, we are seeing the same opportunity with low-interest rates and innovative FinTech platforms like YouHodler.
How to crypto carry trade with YouHodler
The European-based YouHodler (see my review) offers interest rates as high as 12% on various stablecoins and cryptocurrencies. They make it incredibly easy to benefit from this and use the carry trade strategy in three steps. Here’s how to do it:
Step 1: Borrow fiat (e.g. USD or EUR) at a low rate and deposit that fiat to YouHodler. Alternatively, one could simply deposit fiat to YouHodler without borrowing.
Step 2: Convert fiat to any stablecoin on the platform (e.g. USDC)
Step 3: The investor immediately starts to benefit from a crypto savings account featuring a 12% interest rate.
Bonus step: The user can benefit even more as the price of crypto rises against fiat using the platform’s Multi HODL tool.
Low-interest rates are not going away; carry trading might be the solution
For those looking forward to increased interest rates at banks, you’re in for some bad news. Not only are higher interest rates a faraway dream, but we may be in for even lower rates. That’s right, The Bank of England recently announced they are considering the idea of negative interest rates. The idea is coming just a few months after the Bank of England slashed rates to a record low of 0.1% in the early days of the Covid-19 crisis.
Typically, this would be bad news for those looking at their savings account balances dwindle away but thankfully, the new digital economy provides us with more opportunities than ever before. No longer are we at the mercy of central banks. We have options and the crypto carry trade is just one such option to help us keep our money and earn a passive income from it.