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Question

  • What is the convenience yield of the cryptocurrency?

Back-up Explanations

  • According to the 4-page long research paper, Crypto carry, the widely varying funding rates of perpetual futures (sometimes referred to as 'perpetual swap' as well) is due to the convenience yield of cryptocurrencies.

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  • The author argues that the risk-free interest rate $r$ and the storage cost $w$ do not change widely, but the convience yield $y$ does.
  • Convenience yield $y$ means "providing a chance to participate in the bullish crypto market".

The convenience yield equals the opportunity cost. For arbitrageurs, it resembles the opportunity cost to deploy the scarce capital to other arbitrage opportunities, e.g. in a different instrument that offers an event higher carry. For speculative traders, the convenience yield is the opportunity cost of forgoing a speculative gain. For example, if an optimistic trader expects the price to appreciate, she requires a higher compensation, i.e. a higher funding rate.

  • However, when the crypto market is bullish, it is when the opportunity cost of forgoing a speculative gain is high as well. As such, the convenience yield is maximized when the market is bullish.

  • What puzzles me here is that when the market is bullish, futures price tend to be higher than usual because speculators put more leverage to bet on the long position futures. However, if the convenience yield is high, the basis between futures and spot should be minimized. As such, there is a paradox when the convenience is high so the basis should be small, the futures price tend to be much higher than the spot due to speculators, in reality.

  • What is the convenience yield in the cryptocurrency?

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