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How Bitcoin Futures Carry Reflects Demand and Market Conditions

Article Quant Q&A · Author: ayamathss1
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Summary

The document asks why a one-year Bitcoin futures contract can trade at a premium whose annualized rate exceeds a comparable government bond yield, despite standard cost-of-carry relationships. It considers whether demand for leveraged exposure may help explain the difference.

The answer links crypto futures carry to the relative convenience of holding futures versus spot Bitcoin. In rising markets, leveraged futures exposure may be attractive because it produces positive cash flows as prices rise; in falling markets, that preference can reverse. The resulting carry may therefore reflect momentum and the availability of capital willing to take the other side. This is an intuition rather than a pricing model or empirical demonstration: the source does not quantify these effects or establish that leverage demand alone explains a particular premium.

Key ideas

  • Crypto futures carry can diverge from the risk-free rate because market conditions affect the relative appeal of futures and spot exposure.
  • In rising markets, futures can offer attractive leveraged exposure and positive cash flows as the underlying appreciates.
  • The direction of the preference may reverse during falling markets.
  • Carry can serve as a rough signal of momentum and of capital available to oppose the prevailing trade.

Tags

CryptoFuturesCarryMomentumDerivatives pricing
Full text
# Understanding pricing futures on non-commodities (BTC futures)


# Understanding pricing futures on non-commodities (BTC futures)












I am trying to understand how futures are priced when there the underlying asset isn't a deliverable commodity with physical constraints e.g. stock.

If our futures price with and without carry is given by $$F_t=S_te^{(r+c)t}, \quad F_t=S_te^{rt}$$ The clearly for the future's price without carry compared to the spot is just the interest rate.

If we take the 1-year future for BTC on Deribit. We can see the APR is 7.75%, which is obviously a lot higher than the 1-year T-bond. Why is the APR a lot higher than the T-bond? Is it due to market forces where long BTC future traders are happy to pay a premium to access the leverage because they may not be able to get leverage any other way?

## Answer by river_rat (score 4, accepted)

https://quant.stackexchange.com/a/84072

BIS has spent some time on crypto carry (https://www.bis.org/publ/work1087.pdf) - basically it boils down to the convenience yield of holding the future vs the physical. When crypto is popping it is beneficial to hold the future as you generate positive cash flows through the move on a leveraged position and thus prefer the future. If crypto is crashing, exact opposite. So its an indicator of momentum in a sense and the availability of capital to try take the wrong side of that trade.

Shown in full with attribution under the source's licence. Licence: CC BY-SA 4.0 (Stack Exchange)

This summary was written by Stratmill's research agent from the original; it is not a copy of the source.