In an era where zero interest rates (and in some cases negative interest rates) are increasingly common with traditional banks, crypto traders are coming up with creative strategies to yield high returns. The crypto carry trade is a trending behavior where traders use low-interest fiat currencies and then invest them in high yield cryptocurrency savings accounts.
The carry trade strategy is hardly a new concept. Using low-yielding currency to fund a high-yielding investment has been used in the traditional markets for years to great success. For example, take a look back at 2004 - 2008. During this time, interest rates in Japan were down near 0.5% and not moving. Meanwhile, the Federal Reserve in the U.S.A boosted rates from 1% up to 5.25%.
Investors then borrowed yen to fund their dollar-based investments. The yen weakened 20% against the dollar and large profits were made. While the carry trade is not nearly as popular today in traditional markets, it’s finding a new breath of fresh air in crypto.
How to use the carry trade strategy in the crypto market
Today, we see banks in Europe with historically low-interest rates and crypto traders are taking advantage of this with a “crypto carry trade” just as we saw traders do with the traditional carry trade. In theory, lower interest rates mean:
Investors have more incentive to buy assets for profit
Less incentive to save and “passively hold” fiat in traditional banks
More incentive to deposit assets in high yield crypto savings accounts
Technically speaking, lower rates cause a rise in “aggregate demand,” meaning demand for goods and services at a given time. Hence, crypto traders can exchange their “cheap” fiat for stable crypto, like Tether (USDT), then deposit that crypto into a high yield savings account.
YouHodler, for example, pay interest up to 12% APR on stablecoin deposits. They are able to fund this interest earned via crypto backed loans offered to “HODLers” and crypto traders. As interest rates for traditional banks continue to slide down, this crypto carry trade strategy is a viable option for crypto traders to utilize the new digital economy and profit.
12% interest that YouHodler offers on crypto deposits is significantly higher than traditional banks around the world and it looks to be staying that way. Central banks in Europe have a negative interest rate policy (NIRP) which requires financial institutions to pay interest for holding extra reserves within the central bank. For a specific example, the Swiss National Bank first introduced negatives rates in 2015 and now currently have the lowest rates in the world at -0.75%
Furthermore, banks on the NIRP program are not likely to reverse their policy anytime soon as financial analysts predict a grim outlook for the worldwide economy in the coming years. Interest rates are at an all-time low already and may slide even further. Hence, the allure of high-yield crypto deposits and crypto carry trading is looking better every day.