Cash-and-carry is not just arbitrage: choosing a profit strategy in the cryptocurrency market

In the volatile cryptocurrency market, when prices can decline for extended periods, investors face the question of finding alternative ways to generate income. What is cash-and-carry? This is a question that interests both beginners and experienced traders seeking independent profit sources regardless of market trends. There are two main arbitrage strategies that allow earning income regardless of price movement direction: cash-and-carry and carry trade.

How Cash-and-Carry Works: Arbitrage Between Spot and Derivative Instruments

Cash-and-carry is a strategy based on the price difference between buying a crypto asset on the spot market and simultaneously selling a futures contract for the same asset. The mechanism works as follows: the investor takes a long position (buys the asset) and immediately opens a short position on a futures contract. If there is a price discrepancy between these two instruments, profit can be made from this divergence.

A practical example illustrates the concept: suppose you buy 1 BTC at $65,000. At the same time, you sell a futures contract for the same amount of BTC at $67,500. When the futures contract reaches expiration, you close the position. The final result is a fixed profit of $2,500 regardless of how market prices fluctuate during this period.

Besides futures, options can also be used as a second derivative, although futures remain the most popular instrument for this strategy. This is because futures markets operate on more reliable and regulated platforms, where transaction guarantees are higher than on other mainstream venues.

Carry Trade via Interest Rates: An Alternative Income Approach

Carry trade is a different arbitrage approach that originated in traditional financial markets and has entered the crypto industry. This method is based not on price differences but on the interest rate differential offered by various lenders and deposit platforms.

The logic of carry trade is simple: borrow capital at a low-interest rate (for example, from a traditional bank) and invest it in an alternative instrument offering higher returns. Essentially, the arbitrage participant profits from the difference between the borrowing rate and the deposit rate.

For example, if an American bank offers loans at 5% annually, and certain crypto platforms promise 15-18% returns for staking USDT or USDC, the strategy becomes clear. The investor borrows funds from the bank, converts them into stablecoins, and deposits them on a crypto platform. After the period ends, they repay the principal and interest to the lender, keeping the difference between the earned income and paid interest.

The choice of stablecoins (USDT, USDC) for this strategy is not accidental. Since they are pegged to the US dollar, they eliminate price risk, unlike other cryptocurrencies that can significantly depreciate, potentially eroding all the profit from the interest rate differential.

Risks and Reality: Why There Is No Guaranteed Profit

Despite the theoretical attractiveness of both strategies, the practical reality is much more complex. No market participant is interested in providing conditions for risk-free profit, and the market quickly corrects this.

In cash-and-carry, additional costs can reduce or completely offset profits: crypto holding fees, platform commissions, and funding costs. Large discrepancies between spot and futures prices are rare, meaning the absolute potential profit remains modest.

The main risk in carry trade is the reliability of the crypto platform. History of platform collapses (like FTX) has shown that promises of high returns often conceal serious management risks and can result in total loss of funds. Additionally, interest rates in both traditional banking and crypto platforms are constantly changing, which can turn a strategy unprofitable at any moment.

Comparing Cash-and-Carry and Carry Trade: Which to Choose

Cash-and-carry offers the advantage of greater safety: it involves trading on regulated futures exchanges with higher reliability standards. However, returns are usually lower because arbitrage opportunities are quickly neutralized by competition among traders and algorithmic systems.

Carry trade can potentially yield higher returns but requires careful platform selection and constant monitoring of its financial health and reputation. It involves not just analyzing interest rates but also understanding geopolitical and macroeconomic factors influencing interest rate fluctuations across countries.

In practice, carry trade is most often used by banks and institutional investors with timely access to information, larger capital, and the ability to react quickly to changing conditions. For retail traders, it can be riskier.

Practical Recommendations and Conclusion

When considering both strategies, remember that cash-and-carry is a more conservative choice with predictable but modest results. Carry trade offers more attractive figures but requires competent risk assessment and ongoing oversight.

Before implementing either strategy, closely monitor the economic situation in various countries and the conditions offered by crypto platforms. Check the platform’s reputation, insurance mechanisms, and operational history.

Remember: guaranteed profit without risks does not exist in financial markets. Any of these strategies requires active management, thorough analysis, and an understanding that conditions can change at any moment.

The information provided in this material is not individual investment advice. The opinions of the authors may differ from those of analytical resources and independent experts.