Carry Trade Frenzy: Why Bitcoin Will Outlast Wall Street’s Leverage Game
The 60/40 Split is Dead—A New Era of Long and Short Global Carry is Coming
Gather around guys, it's story time -
When the Fed began raising interest rates in 2022, old-school boomers lamented, "Wall Street is doomed because there’s a generation of ~40-year-old MDs who’ve never managed risk in a high-rate environment." Well, guess what? Equities are now at an all-time high. So clearly, those concerns were misplaced. But there's a valuable lesson in this.
After nearly a decade of the "Fed put," the world has become conditioned to view the global financial system as one giant carry trade. And I’m not just talking about just the FX implementation. Look at companies like Apple issuing cheap debt to buy back stock, private credit markets yielding better returns than public debt, and structured credits, like CLOs, ending up in ETF wrappers. The underlying theme is the same: liquidity flows from those that are low to those with high. Carry trades, by definition, involve leverage and are short volatility.
In this context, the Fed put becomes more valuable as rates rise. Why? Because with rates further from the zero bound, there’s more room for the Fed to flex its muscles, using trial and error to manage policy. The higher the rate, the more powerful and frequent the Fed’s intervention can be.
There’s an important insight from seasoned derivatives traders about how models can break under extreme conditions. Typically, increasing implied volatility on an out-of-the-money put makes its delta more negative, as the option becomes more likely to end up in the money. But when volatility reaches extremely high levels, something counterintuitive happens—the delta starts to turn positive. Why? Because the downside is capped at zero, but the upside is unbounded. This demonstrates how asymmetrical risk becomes when volatility soars—extreme moves to the right are more likely than extreme moves to the left.
The Fed put operates in the same way: it’s inherently more powerful at 5.5% than at 0%. This fuels even more "carry trade" risk-taking, which partly explains why equities are at an all-time high. It’s a mistake to think the stock market reflects the health of the economy; in today’s world, the economy reflects the health of the market. That’s the result of financializing global liquidity to this degree.
As a trader, I know that nothing short-vol lasts forever. One day, this will all unwind. What does this mean for crypto? Right now, equities and crypto seem correlated, with many claiming both are risk-on assets driven by global liquidity. That’s wrong. Equities are a risk-on asset within the carry trade, fueled by global liquidity; Bitcoin, however, isn’t part of anyone’s carry trade—yet. And for good reason.
At its core, Bitcoin is the anti-carry trade asset. Its natural state at low volatility tends to creep lower like a theta decay, with the explosive ups and downs. It’s a long-vol asset, and low leverage (only 3% of its spot market is derivatives, compared to TradFi, where the derivatives market is 10x the size of the spot market).
If you believe this, we’re on the verge of a pivotal divergence between equities and Bitcoin. For now, both can rise in tandem, but mark my words: the day will come when equities implode as collateral multipliers collapse. And when that reckoning arrives, Bitcoin will thrive—because its collateral is unshakable: it is itself. The old 60/40 portfolio split between equities and bonds is dead. The new paradigm should be long global carry and short global carry—because that's where the real battle for financial survival will be fought.