Carry Trade
A carry trade is a strategy that earns a recurring return, the carry, from a difference in yields or rates, while trying to limit exposure to price moves. The classic version borrows in a low-interest currency to hold a higher-yielding one; in crypto, carry usually comes from futures basis or funding rates.
The classic currency carry trade
In traditional markets, a carry trade means borrowing money where interest rates are low and investing it where rates are higher, pocketing the difference. For years the Japanese yen was a popular funding currency because Japanese rates were near zero. The trade works as long as the exchange rate stays reasonably stable.
The danger is that many traders crowd into the same position. When the funding currency suddenly strengthens, they rush to close at once. In early August 2024, a rapid unwind of yen carry trades was widely cited as one factor in a sharp global sell-off that also hit crypto.
Carry in crypto
Crypto has its own carry sources. The cash-and-carry or basis trade buys spot and sells a futures contract priced higher, earning the gap at expiry. With perpetual futures, traders hold spot and short the perp to collect positive funding. Some also borrow stablecoins at one rate in DeFi and lend or stake elsewhere at a higher one.
Say a trader holds 1 ETH and shorts 1 ETH on a perp while funding is positive. If funding pays the equivalent of 10 percent a year, that is the carry, earned without betting on ETH's direction, as long as conditions hold.
Why carry is not free money
Carry returns tend to be steady and small, while losses can be sudden and large, a pattern often described as picking up coins in front of a steamroller. Funding can turn negative, basis can collapse, borrowing rates can spike and the short leg can be liquidated in a rally. Exchange or protocol failures can wipe out both legs, as FTX's collapse in 2022 showed for many traders running such strategies.
When the same carry trade becomes popular, its returns shrink and the risk of a crowded exit grows.
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Frequently asked questions
What does carry mean?
Carry is the return you earn from simply holding a position over time, such as interest, funding or basis, separate from any price change.
Is the crypto basis trade a carry trade?
Yes. It earns the spread between spot and futures over time while trying to stay neutral to price, which is the defining feature of carry.
What is a carry trade unwind?
When many traders close the same carry position at once, usually after a shock, the forced buying and selling can move markets sharply.
Related terms
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