Basis trading
Basis trading, or cash-and-carry arbitrage, means buying an asset on spot and shorting the same amount in futures that trade at a premium. Price exposure nets to roughly zero, and the trader earns the basis, the gap between the futures and spot price, as the two converge.
Basis calculator
How it works
The basis is the futures price minus the spot price. When futures trade above spot the market is in contango and the basis is positive; when they trade below spot it is in backwardation. Crypto spends most of its time in contango, because demand for leveraged long exposure is usually larger than demand to short.
Basis trading, usually called cash-and-carry arbitrage, takes the other side of that demand:
- Buy the asset on spot.
- Short the same amount in futures.
- Hold until the futures contract expires, or until the spread has closed.
The position is long and short the same asset, so a move in price produces a gain on one leg and a matching loss on the other. What is left is the spread.
There are two versions, and they carry different risk. With a dated future (for example a quarterly contract on CME or a crypto exchange), the contract settles to spot at expiry, so the spread is locked in at entry. With a perpetual future there is no expiry. The trader instead collects the funding rate that longs pay shorts. That income is variable: it can shrink, or turn negative so that the short pays.
To compare a basis with other returns it is annualized:
Annualized basis = (futures − spot) / spot × 365 / days to expiry
The calculator above does exactly this: enter spot, the futures price and days to expiry, and it returns the basis in dollars, in percent and annualized.
A worked example
BTC spot is $100,000. A quarterly future with 90 days to expiry trades at $102,000.
- Basis: $102,000 − $100,000 = $2,000, or 2.0%
- Annualized: 2.0% × 365 / 90 = 8.1%
You buy 1 BTC spot and short 1 BTC of the future. At expiry the future settles to spot, whatever that is:
| BTC at expiry | Spot leg | Short future | Total |
|---|---|---|---|
| $80,000 | −$20,000 | +$22,000 | +$2,000 |
| $100,000 | $0 | +$2,000 | +$2,000 |
| $130,000 | +$30,000 | −$28,000 | +$2,000 |
Costs come off the top. If fees and slippage on the four fills add up to about $200, the net is $1,800, or 7.3% annualized (1.8% × 365 / 90). On a spread this size, fees are not a rounding error.
The table hides a cash problem. If BTC rallies to $125,000 halfway through, the short future shows a loss of more than $23,000 that the futures exchange wants covered with margin now. The matching gain sits unrealized on the spot leg, possibly on another venue. A trader who cannot move collateral fast enough can be liquidated on the short leg while the trade is, on paper, perfectly hedged.
What it tells you
The size of the basis is a price for leverage. A wide, persistent basis means leveraged longs are paying a lot to hold futures instead of spot, and that there is not enough arbitrage capital to sell futures against them. Cash-and-carry traders push the spread down by doing the trade, so a basis that stays wide says their capital or margin is constrained.
How the basis compresses also carries information. A basis that narrows slowly while price grinds higher usually means spot demand is catching up. A basis that collapses while price stalls or falls often means carry trades are being unwound: arbitrageurs buy back their futures and sell their spot, which removes a large holder of spot from the market at the same time.
A negative basis, or deeply negative funding on perpetuals, tends to show up in sharp selloffs when hedging and short demand drag futures below spot.
When it matters most
The trade is most attractive when leverage demand is high, which is also when the market is most fragile. High funding and high open interest widen the basis, and they are the same conditions that set up a liquidation cascade. A carry trader then faces the largest margin calls exactly when exchanges are under the most stress.
The basis also matters when comparing it with the cost of capital. If the annualized basis falls below what the same capital earns elsewhere, for example in stablecoin lending, carry capital leaves, which is why spreads tend to settle near that level.
Common misconceptions
"A futures premium is the market's forecast." The premium reflects financing cost and demand for leverage. A future at $102,000 does not mean the market expects BTC at $102,000.
"It is risk-free." It is hedged against price, not against everything. Exchange failure, withdrawal limits, margin calls on the short leg, execution gaps and funding turning negative on perpetuals all remain.
"Perpetual funding and quarterly basis are the same trade." The quarterly spread is fixed at entry and paid at convergence. Perpetual funding is reset every interval and can change sign the next day.
"A wide basis is free money nobody has noticed." It is usually wide because the capital and margin needed to take the other side are scarce at that moment, which is also when the risks above are highest.