Crypto Carry

We analyze the dynamics of carry in crypto markets—the difference between futures and spot prices—and document that it can reach exceptionally high levels, sometimes exceeding 40% per annum, with significant variation over time. This phenomenon reflects a substantial and volatile inconvenience yield associated with holding spot cryptocurrencies relative to futures. We trace the large and volatile crypto carry to the interplay of two main forces: (i) demand from smaller, trend-chasing investors seeking leveraged exposure and (ii) the limited deployment of arbitrage capital because of regulatory and margin frictions. Our findings highlight how structural limits to arbitrage—especially severe in the case of crypto—can amplify price inefficiencies across financial markets, offering lessons for understanding asset pricing and market behavior more generally. This paper was accepted by Agostino Capponi, finance. Funding: M. Schmeling acknowledges financial support from the German Science Foundation Grant SCHM 2623/2-1. Supplemental Material: The online appendix and data files are available at https://doi.org/10.1287/mnsc.2024.05069 .