A basis trade holds an asset and sells a futures contract on the same asset, so that price moves on one leg are offset by the other. What remains is the gap between the two prices, called the basis, or, with perpetual futures, the funding payments.
What is the basis?
The basis is the difference between the futures price and the spot price of the same asset. When the future trades above spot, the basis is positive. When it trades below, the basis is negative. Some texts define it the other way round, as spot minus futures. The sign changes; the idea doesn’t.
How does a basis trade work?
A basis trade buys the asset in the spot market and sells a future on it in the same size. If the price rises, the spot leg gains and the short future loses about the same amount. If the price falls, the reverse. Price mostly drops out. What the position is exposed to is the basis.
Illustration, not market data: spot trades at 100 and a dated future at 102. Buy spot, sell the future. At expiry the future settles to the spot price, so the 2 of basis is captured whatever the price did in between, before costs.
Where does the return come from?
It depends on the future. A dated future converges to spot at expiry, so the basis at entry is what the trade earns over its life, before costs. A perpetual future never expires. Instead, a periodic funding payment pulls its price toward spot, and the short side receives that payment when funding is positive. See How perpetual funding works.
Why do futures trade away from spot?
Because leverage has a price. A future gives price exposure without paying for the asset in full. When many traders want leveraged long exposure, they pay up for it, and futures trade above spot. When positioning leans short, the gap narrows or turns negative. In traditional markets, the basis mostly reflects the cost of carry: interest, storage, dividends. In crypto, it also reflects demand for leverage.
What are the risks of a basis trade?
A basis trade is not risk-free. It swaps price risk for a different set of risks.
- The basis or funding turns. The gap can shrink, vanish or flip sign. With perpetuals, negative funding means the short side pays.
- Costs. Trading fees, spreads, financing and transfers come out of the basis. A thin basis can be smaller than the cost of holding it.
- Liquidation. The short future needs margin. A sharp rise in price can push the short toward liquidation even while the spot leg gains, especially when the spot is held somewhere else.
- Venue and custody. Assets on an exchange carry that exchange’s risks. Holding spot off-venue reduces exposure to one venue, but splits the position across two places.
- Execution. Real fills differ from modeled ones, and the hedge is never exact. Over time the legs drift apart and need rebalancing.
How does OpenBasis relate to this?
OpenBasis tests one version of this trade in public: long spot ETH and BTC held off-venue, short perpetual futures on the matching notional, on a deep venue. The studies that test it are published in full, including the ones that fail. OpenBasis publishes no target return. The practice → · Research →