A carry trade involves borrowing at a low interest rate and investing in an asset that provides a higher rate of return.

Here’s the general process:

- You take out a loan in a currency that has a low or near-zero interest rate, such as the Japanese yen (JPY), which has had a low interest rate for years.

-  Then you convert that money into a currency with a higher interest rate, such as the US dollar. 

- Once you have the higher-yielding currency, you invest it in assets such as US government bonds or other assets that provide good returns.

- For example, if you borrow yen at 0% interest and invest it in something with 5.5% interest, you will get that 5.5% minus any fees or charges. It is like turning cheap money into more money as long as the exchange rate is stable.

What low interest rates mean in crypto market :

- Investors have more incentive to buy assets for profit

- Less incentive to save and passively hold fiat in traditional banks

- More incentive to deposit assets in high yield crypto savings accounts

- Technically speaking, lower rates cause a rise in aggregate demand, meaning demand for goods and services at a given time. 

- Hence, crypto traders can exchange their cheap fiat for stable crypto, like Tether (USDT), then deposit that crypto into a high yield savings account.

Example: pay interest up to 12% APR on stablecoin deposits. 

- They are able to fund this interest earned via crypto backed loans offered to HODLers and crypto traders. As interest rates for traditional banks continue to slide down, this crypto carry trade strategy is a viable option for crypto traders to utilize the new digital economy and profit

1. Risk-tolerant 

- To be sure, carry trades only work when both currencies maintain a sufficiently large difference in interest rates. 

- This means carry trades perform well during periods of low volatility, when the currencies being traded remain fixed relative to each other.  

- This is also why carry trades are a popular strategy, as they offer lower risk compared to other forex strategies. The idea is to continue earning a steady stream of interest revenue, while any capital appreciation is seen as a bonus.  

2. Portfolio Diversification

- Carry trades can also be applied across different asset classes to diversify risks and avoid being overly concentrated in the forex markets. 

- This can be achieved by borrowing a low-interest currency and then using it to purchase stocks or bonds denominated in a currency with a higher yield.