Implied Crypto Lending Rates

This post was originally published on April 23, 2019, and sent to Messari Pro subscribers.

Synthetic instruments are used regularly in finance to engineer returns that simulate other investments. Rather than purchase an underlying asset or basket of assets, investors often prefer to invest in synthetic instruments that allow them to bet on a trend or portfolio without active management responsibilities, or without much collateral.

Synthetic debt instruments are an important, but less widely understood component of the crypto markets today. And their interest rates aren’t often advertised but rather derived from trades between complementary products, particularly on exchanges that offer margin trading and/or futures.

For example, one of the most liquid synthetic loan positions you can build in crypto is on BitMEX. You can short Bitcoin futures and long Bitcoin spot.

When you enter this position:

• You send USD as collateral, and you borrow BTC (long).
• At this point, the price of the future may be different from the price of the spot. That’s to be partially expected given the volatility of the underlying asset, but the primary difference between the two (at least in an efficient market) would be the implied interest rate on the BTC borrow.