The rapid growth of cryptocurrency markets has created new challenges for financial regulators and policymakers. With total crypto capitalisation in excess of $3 trillion, understanding how well these markets function has become essential for financial stability considerations. In this regard, a particularly puzzling feature has emerged over recent years: the persistent and large gap between crypto futures and spot prices, the so-called basis or crypto carry has been very large, at times exceeding 40% per annum. This raises important questions about crypto market efficiency, regulatory barriers, and the role of institutional capital in newly emerging asset classes.
The puzzle of crypto carry
In well-functioning markets, arbitrage activity typically eliminates persistent price differences between related securities. Yet pricing inefficiencies appear to be widespread across cryptocurrency markets. Makarov and Schoar (2020) document substantial arbitrage deviations in crypto assets and find that transaction costs alone cannot explain the magnitude of these spreads. Similarly, in cryptocurrency futures markets, the difference between futures and spot prices, known as carry or basis, has remained stubbornly large and volatile. This phenomenon is often portrayed in financial media as a risk-free arbitrage opportunity. However, our research demonstrates that this perception is misleading and that understanding why this carry persists offers valuable lessons for financial regulation and market design.
Figure 1 shows the time series of annualised crypto carry for bitcoin (BTC) and ether (ETH) for one-month and three-month futures contracts. Carry is persistent, shows large spikes and averages around 7-8% per year, depending on the asset and contract. On the face of it, crypto thus offers an 8% return per year that carries no price risk, as futures and spot prices converge at maturity.
Figure 1 The dynamics of crypto carry for bitcoin (BTC) and ether (ETH)
Notes: The figure shows the dynamics of crypto carry for BTC and ETH on the crypto-native exchange OKEx.
Sample: March 2019 to July 2024 for OKEx. The data on crypto derivatives come from Skew and Coinmetrics.
What drives crypto carry?
The textbook framework for futures pricing suggests that this futures-spot differential should reflect interest rate differentials, storage costs, and convenience yields. In commodities markets, for instance, convenience yields typically favour holding the physical asset due to its immediate availability for production or consumption (Gorton and Rouwenhorst 2006, Koijen et al. 2018). This serves as the starting point of our analysis.
Our empirical analysis in a recent paper (Schmeling et al. 2025) reveals that observable fundamental factors cannot explain the magnitude and volatility of crypto carry. Interest rate differentials between cryptocurrency lending markets and traditional finance are too small and stable to account for the large swings in crypto carry. Storage costs for digital assets are negligible. This leaves convenience yields as the primary driver. However, contrary to commodity markets, Figure 1 shows that cryptocurrencies exhibit the opposite pattern: a negative convenience yield, meaning investors prefer futures contracts over spot holdings. This resembles dynamics observed in some government bond markets, where balance sheet constraints make derivatives more attractive than the underlying securities (e.g. Duffie 2020, Schrimpf et al. 2020).
The key question therefore is: where do these large and negative convenience yields in crypto come from? Two key forces emerge from the data. First, we observe that smaller, trend-following investors generate substantial buying pressure in futures markets (see Figure 2). Using data from the Commodity Futures Trading Commission, we show that increases in net long positions by smaller traders (classified as ‘nonreportables’) are strongly associated with higher carry. These investors appear attracted to futures contracts because they offer leveraged exposure to cryptocurrency price movements with minimal upfront capital, particularly on unregulated exchanges where high leverage is possible.
Figure 2 The dynamics of positions in bitcoin futures on the Chicago Mercantile Exchange (CME) from different investor types
Notes: This figure shows the dynamics of positions in BTC futures on the CME from different types of investors, i.e. dealer intermediaries, institutional investors, leveraged funds, and nonreportables, respectively.
We provide causal evidence supporting this demand-driven explanation from the introduction of micro Bitcoin futures on the Chicago Mercantile Exchange (CME) in May 2021. These contracts, sized at one-fiftieth of standard Bitcoin futures, made it significantly easier for smaller investors to trade these contracts. Using a difference-in-differences analysis, we find that this introduction increased carry on the CME relative to other exchanges by approximately 11%, providing causal evidence that demand from smaller investors pushes up the basis.
Why don’t arbitrageurs close the gap?
If demand from smaller investors drives up futures prices relative to spot, sophisticated market participants should take advantage through cash-and-carry trades: buying spot cryptocurrency while simultaneously selling futures contracts. This strategy should lock in the price differential and eliminate the mispricing. So why doesn’t this happen on a sufficient scale?
The answer lies in regulatory barriers and margining frictions that create limits to arbitrage. Regulatory barriers have long restricted many institutional investors from holding spot cryptocurrencies in the first place, which makes executing a cash-and-carry trade impossible for them. Even those able to hold spot positions face a critical friction: the absence of cross-margining between spot and futures positions on regulated exchanges. On the CME, traders cannot post spot Bitcoin as collateral for futures positions but must instead pledge liquid assets in US dollars. This means arbitrageurs must effectively fund their positions twice, once for the spot purchase and again for futures margin requirements.
This friction exposes carry traders leaning against a wide basis to substantial risk. When futures prices rise before contract maturity, traders holding short futures positions face mark-to-market losses that can trigger forced liquidations before the spot and futures prices converge. Our analysis shows that with leverage of just ten times (far below the maximum offered on many exchanges), the futures leg of a cash-and-carry strategy would have faced liquidation in over half the months in our sample.
Empirically, we document that higher carry – futures bitcoin prices rising more than spot – significantly predicts liquidations of short futures positions. A 10% increase in standardised carry predicts a 22% increase in sell liquidations relative to total open interest over the following month. This confirms that what appears as a risk-free trade actually exposes arbitrageurs to considerable liquidation risk, limiting their willingness to deploy capital.
The importance of frictions and regulation: The spot exchange-traded fund natural experiment
The introduction of spot Bitcoin exchange-traded funds (ETFs) in January 2024 provides causal evidence on how reducing regulatory barriers affects price distortions. While the exchange-traded funds do not resolve the cross-margining friction itself, they allow institutional investors in traditional finance to more easily hold instruments tracking spot Bitcoin as part of cash-and-carry strategies.
Using a difference-in-differences analysis around the exchange-traded funds introduction, we find that crypto carry decreased by approximately three percentage points across all exchanges and by an additional five percentage points on the Chicago Mercantile Exchange (see Figure 3). These represent economically large reductions of 36% and 97% of mean carry, respectively. This finding demonstrates that regulatory barriers separating cryptocurrency markets from traditional finance have tangible effects on pricing efficiency.
Figure 3 The dynamics of basis around the introduction of the spot Bitcoin exchange-traded fund
Notes: The figure shows the dynamics of one-month BTC basis on CME (red) and the average basis on OKEx, Huobi, Deribit and Kraken (blue) around the introduction of the spot BTC ETF (marked with dashed vertical line).
Broader lessons
Our findings highlight several important broader implications. First, market segmentation driven by regulatory restrictions can create persistent pricing distortions even in fairly liquid markets. When sophisticated arbitrage capital cannot freely move between market segments, less sophisticated investors can drive prices away from fundamental values, potentially creating feedback loops during price booms. Second, establishing clear regulatory frameworks early in the development of new asset classes can promote healthier market dynamics. Rather than waiting for markets to mature before establishing clear rules, proactive regulation may prevent the buildup of structural inefficiencies.
More broadly, recent contributions emphasise that regulatory design and the growing integration of crypto into traditional finance, e.g. via stablecoins, tokenisation, and exchange-traded funds, can materially shape market functioning and pricing dynamics (Cecchetti and Schoenholtz 2025, Aldasoro et al. 2024, Claessens and Auer 2018). Third, our analysis demonstrates that cryptocurrency futures markets, dominated by smaller retail investors on the long side, behave differently from traditional commodity or financial futures markets where commercial entities and institutions play larger roles. Understanding these differences is essential for appropriate regulatory design.
References
Aldasoro, I, G Cornelli, L Gambacorta, M Ferrari Minesso and M M Habib (2024), “Stablecoins and money market funds: Less similar than you think”, VoxEU.org, 22 November.
Aquilina, M, J Frost and A Schrimpf (2024), “Decentralised Finance (DeFi): a functional approach”, Journal of Financial Regulation 10(1): 1–27.
Cecchetti, S and K L Schoenholtz (2025), “Crypto, tokenisation, and the future of payments”, VoxEU.org, 22 August.
Claessens, S and R Auer (2018), “Regulating cryptocurrencies: Assessing market reactions”, VoxEU.org, 9 October.
Duffie, D (2020), “Still the World’s Safe Haven?”, Hutchins Center Working Paper No. 62.
Gorton, G and K G Rouwenhorst (2006), “Facts and Fantasies about Commodity Futures”, Financial Analysts Journal 62(2): 47-68.
Koijen, R S, T J Moskowitz, L H Pedersen and E B Vrugt (2018), “Carry”, Journal of Financial Economics 127(2): 197-225.
Makarov, I and A Schoar (2020), “Trading and Arbitrage in Cryptocurrency Markets”, Journal of Financial Economics 135: 293-319.
Schmeling, M, A Schrimpf and K Todorov (2025), “Crypto Carry”, Working Paper.
Schrimpf, A, H S Shin and V Sushko (2020), “Leverage and Margin Spirals in Fixed Income Markets during the COVID-19 Crisis”, BIS Bulletin No. 2.
