What is a basis trade?
- Author
- CRYPTO PORT Editorial
- Published
- Updated
- Reading time
- 5 min
In short
A basis trade targets the gap between spot and futures prices. You buy the spot asset and sell an equivalent futures position, aiming to capture the gap as it narrows. It is not a directional bet, but margin management, venue failure and a reversing funding rate remain very real risks.
Key points
- Long spot and short futures in equal size
- The target is the converging gap, not direction
- If margin runs out, the futures leg is forcibly closed
- Venue failure or withdrawal freezes are the biggest risk
Definition
A trade holding equal and opposite positions in an asset's spot and futures markets, profiting as the price gap between them converges while directional moves broadly cancel out.
When futures trade above spot, buying spot and selling the same size of futures leaves price moves largely cancelling each other. What is left is the gap. A dated future must converge at expiry, so the gap closes for certain; a perpetual instead pays through funding. Either way, how much the gap is worth depends on market conditions and is not knowable in advance.
Only direction is neutralised, not risk. A sharp rally puts the short futures leg deeply in the red and calls for more margin. If the top-up does not arrive, only the futures leg is force-closed and the trader is left holding spot alone — a common way for this trade to come apart.
Larger still is the risk of holding the two legs in different places. If a venue halts withdrawals or fails, one leg can vanish while the other remains as naked directional exposure. That is exactly what happened to a number of supposedly hedged books when a major venue collapsed.
Watch out for
- · A rally can exhaust margin on the futures leg, closing it and leaving the hedge broken
- · Splitting legs across venues means one failure or withdrawal freeze leaves you one-sided
- · With perpetuals the funding rate can flip, turning a receiving position into a paying one