Carry trading is one of those strategies that keeps showing up across financial markets. Whether it’s in traditional currency pairs or the more experimental corners of crypto, the logic stays the same. You borrow money where it is cheap and you invest it where it pays more. The profit comes from the gap between those two yields.
It sounds simple enough, but the execution is anything but. When done well, carry trades can generate consistent income without needing the market to trend up or down. That’s part of the appeal. You are not betting on price movements. You are getting paid for holding a position. That turns it into a core tool for hedge funds, institutional players, and now, increasingly, for crypto traders.
What Is a Carry Trade
At its core, a carry trade is a strategy where you borrow capital in one currency or asset with a low interest rate and use it to buy another currency or asset with a higher yield. The goal is to collect the difference between what you earn and what you pay — this is known as the interest rate differential.
The profit is called the carry. When the interest you earn is greater than what you owe, the trade is said to have a positive carry. In theory, you can just sit back and collect this spread over time. In reality, several factors can interfere with the outcome, especially when currencies or crypto assets start moving in unexpected ways.
A Real Example Using Traditional Currencies
This strategy has been a favourite in foreign exchange markets for decades.
Let’s say you borrow Japanese yen, which has had near-zero interest rates for years. You convert that yen into Australian dollars, which historically have had much higher interest rates. Then you use those Australian dollars to buy short-term bonds or deposit them in an interest-bearing account.
You now earn the Australian interest rate while only paying the Japanese rate on your loan. As long as nothing changes dramatically, that difference is your profit.
This worked well when global markets were stable and interest rates stayed predictable. But carry trades can unravel quickly when central banks raise rates or currencies swing too far, too fast.
Where It Shows Up in Crypto
Crypto markets have adopted the same concept, just with a different set of tools. Instead of national currencies, traders use tokens and stablecoins.
You might borrow a low-yield stablecoin like USDC at two percent interest. Then you invest that borrowed capital into a DeFi protocol offering ten percent on a staking or lending product. You earn the eight percent spread as long as the protocol holds up and your collateral stays secure.
The difference here is that crypto platforms often offer significantly higher yields but also come with higher risks. Protocols can break. Tokens can depeg. Liquidity can vanish in hours. Still, the core idea mirrors traditional carry trades: borrow cheap, invest where it pays more, and collect the difference.
Why Carry Trades Remain So Popular
First, they generate income without requiring a big price move. If the underlying currencies or tokens stay within a range, the trade keeps paying. That makes carry trades attractive in flat or sideways markets when directional bets are harder to time.
Second, the strategy often behaves independently from stocks or crypto price action. This low correlation can help diversify a portfolio. When other positions are volatile, the carry trade may keep ticking along, offering a sense of stability.
Third, carry trades can be magnified using leverage. By borrowing more capital than you start with, you can scale up the returns. This is also where the risk increases, especially if the market moves against you.
What Can Go Wrong
Currency risk is the biggest danger. If the currency you borrow strengthens or the one you invest in weakens, your profits can disappear. In some cases, they flip to losses even if the interest rate spread was in your favour.
Interest rate changes are another major factor. Central banks do not warn you before they change course. A single rate hike can collapse a positive carry and force traders to unwind their positions.
Leverage adds another layer of fragility. If you borrow heavily to boost your yield and the value of your collateral drops, you could face liquidation. This is especially risky in crypto, where asset values can collapse in minutes.
And then there is platform risk. In crypto, the DeFi protocol you’re relying on might be hacked or drained. Smart contracts fail. Liquidity can dry up. Yields that look too good often are.
Who Uses Carry Trades
Hedge funds and macro traders have used carry strategies in foreign exchange markets for years. It is one of the go-to tools for generating returns when broader markets are stuck in neutral.
In the crypto world, arbitrage desks, yield farmers, and high-volume DeFi traders have taken the concept and rebuilt it using stablecoins, wrapped assets, and lending protocols. It has also become common among miners and treasuries looking to earn extra yield without adding more price exposure.
For both traditional and digital markets, the motivation is the same. Generate consistent income by exploiting mismatches in funding costs and yield opportunities.
When volatility is high and direction is hard to call, carry becomes less about chasing momentum and more about discipline, patience, and managing risk with a calculator, not just gut feeling.
