Carry trading is borrowing at a low interest rate and invest in a high interest rate.
It's mostly popular in FX due to interest rate differentials. Let's say, you can borrow 0.5% in Japanese yen, and invest it at 5% in Australian dollar. If the spot price of AUDJPY (Australian dollar against Japanese Yen) doesn't change much, you'll profit 4.5%. The variant of the idea, namely cash & carry arbitrage can be traded in crypto assets.
Cash & carry arbitrage is a market-neutral strategy that requires taking positions both at spot and futures markets. In this example we'll talk about Bitcoin. Let's say, BTC price is $20,000 but BTC futures price is $20,100 on CME. This is what in market jargon called contango - when futures price is higher than spot price.
So, when the market is in contango, you can buy BTC at spot market and short the next month BTC futures. As the contract near the expiration date, futures price will converge the spot price. Near or at the maturity date you'll close the carry trade by selling your Bitcoin at spot market and buying BTC futures contract. Thus, you'll generate almost riskless return. The steeper the contango is, the more profit you'll gain.
