Crypto Basis Trading Guide: Funding Rate Arbitrage & Cash-and-Carry
Basis trading is how professional traders earn yield without taking directional risk. By going long spot and short perpetuals, you collect funding payments while staying market-neutral. Learn the mechanics, risks, and execution.
- Basis trading = long spot + short perp to collect funding while staying delta-neutral.
- Yields range from 10-30%+ APY in bull markets but can turn negative in bears.
- Thrive monitors funding rates across exchanges and alerts on optimal entry points.
Basis Trading Calculator
Calculate potential yields from funding rate arbitrage:
The Trade
- 1. Buy $25,000 of ETH spot
- 2. Short $25,000 of ETH perps (1x)
- 3. Collect funding every 8 hours when positive
- 4. Delta-neutral: profit regardless of price direction
Key Risks: Funding rates can flip negative (you pay instead of earn), exchange risk, liquidation if position sizes drift, and negative basis during bear markets. This is not risk-free yield—it's arbitrage with execution risk.
How Basis Trading Works
The core concept is simple: perpetual futures prices tend to trade at a premium to spot in bull markets. This premium is corrected through funding payments from longs to shorts. By being short perps AND long spot, you capture this payment without price exposure.
The Basic Setup
- Buy spot: Purchase $50,000 of ETH on an exchange or hold in wallet
- Short perp: Open $50,000 short perpetual position (1x leverage)
- Collect funding: When funding is positive, you receive payments every 8 hours
- Stay neutral: If ETH goes up, spot gains offset perp losses. If down, vice versa.
Why Does Funding Exist?
Perpetual futures have no expiry, so there's no natural convergence to spot price. Funding rates are the mechanism that keeps perp prices anchored:
- Perp > Spot (positive funding): Longs pay shorts → incentivizes shorting → price comes down
- Perp < Spot (negative funding): Shorts pay longs → incentivizes longing → price goes up
In bull markets, speculators pile into longs, pushing perp prices above spot. They pay funding to shorts. Basis traders capture this payment.
The Math
Position: $100,000 capital split 50/50
Spot long: $50,000 ETH
Perp short: $50,000 (1x)
Funding rate: 0.01% per 8 hours
Daily funding: 0.01% × 3 × $50,000 = $15/day
Annual yield: $15 × 365 = $5,475 = 10.95% APY
In hot markets, funding can hit 0.1%+ per 8 hours, pushing APY above 50%. In cold markets, it can go negative.
Key Insight: Your return is funding rate minus costs (fees, capital cost, execution slippage). High funding rates don't mean guaranteed profits if your costs are also high.
Executing the Trade
Step 1: Choose Your Venues
For spot position:
- Same exchange as perp (simplest, but adds counterparty risk)
- Self-custody wallet (safer but harder to manage)
- Lending protocol (earn additional yield but adds smart contract risk)
For perp position:
- CEX: Binance, Bybit, OKX (deepest liquidity, counterparty risk)
- DEX: dYdX, Hyperliquid, GMX (self-custody but potentially worse funding)
Step 2: Size Your Position
Critical rule: spot and perp notional values must match exactly.
- $100K capital → $50K spot + $50K perp (1x leverage)
- If you use 2x leverage on perp, you can deploy more capital but add liquidation risk
Step 3: Open Simultaneously
Minimize slippage by opening both legs quickly:
- Calculate exact quantities
- Place spot market order
- Immediately place perp short market order
- Verify sizes match
Even a few seconds delay can create slippage in volatile markets.
Step 4: Monitor and Rebalance
Positions drift over time:
- Spot value changes with price
- Perp margin may need adjustment
- Funding accumulates and should be managed
Rebalance when positions diverge by more than 5%.
| Factor | Bull Market | Sideways | Bear Market |
|---|---|---|---|
| Funding Rate | High positive | Low positive/neutral | Negative |
| Typical APY | 20-50%+ | 10-20% | -10% to +5% |
| Strategy | Aggressive basis | Standard basis | Avoid or reverse |
| Risk Level | Medium | Low | High (if positioned wrong) |
Risk Analysis
Risk 1: Funding Rate Reversal
The risk: Funding goes negative. Instead of collecting, you're paying.
Mitigation:
- Monitor funding trends, not just current rate
- Set alerts for funding approaching zero or negative
- Be ready to close positions if market regime shifts
Risk 2: Counterparty/Exchange Risk
The risk: Exchange gets hacked, insolvent, or freezes withdrawals (FTX scenario).
Mitigation:
- Use multiple exchanges, limit exposure to any single one
- Consider DEX perps for the short leg
- Keep spot in self-custody when possible
- Monitor exchange health metrics
Risk 3: Liquidation Risk
The risk: Even at 1x leverage, extreme moves can cause liquidation if you don't maintain margin.
Example: ETH crashes 50% in hours. Your spot is down $25K. Your perp is up $25K in PnL but requires margin maintenance. If you can't add margin fast enough, liquidation.
Mitigation:
- Keep excess margin in perp account
- Use cross-margin where available
- Set liquidation alerts far above actual liquidation price
Risk 4: Execution/Basis Risk
The risk: Spot and perp don't move exactly together. During volatility, spreads can blow out, causing temporary losses.
Mitigation:
- Use highly liquid markets (BTC, ETH perps)
- Avoid opening/closing during extreme volatility
- Accept some tracking error as cost of business
Reality Check: Basis trading is marketed as "delta neutral" but has real risks. FTX collapse taught that exchange risk alone can wipe out positions. Size appropriately and diversify.
Advanced Basis Strategies
Strategy 1: Multi-Exchange Arbitrage
Funding rates differ across exchanges. Sometimes dramatically.
Setup:
- Short perp on high-funding exchange (Bybit at 0.05%)
- Long perp on low-funding exchange (dYdX at 0.01%)
- Collect the spread (0.04% per 8h)
Challenges: Managing two perp positions is complex; both need margin; execution timing critical.
Strategy 2: Funding Rate Sniping
Open positions just before funding settlement, close right after.
Setup:
- Monitor funding countdown
- Open short perp 1-2 minutes before settlement
- Receive funding payment
- Close immediately after
Challenges: Fees eat into small payments; slippage risk; not scalable.
Strategy 3: Leveraged Basis
Use lending for spot side to free up capital.
Setup:
- Deposit $50K as collateral on Aave
- Borrow $40K ETH (80% LTV)
- Short $40K ETH perps
- Collect funding on $40K notional with only $50K capital
Yield boost: Higher capital efficiency; funding on larger notional.
Risk: Liquidation risk on Aave if ETH pumps; smart contract risk; more complex position management.
Strategy 4: Yield Stacking
Combine basis with staking yields.
Setup:
- Hold stETH (earning ~4% staking yield)
- Short ETH perps (earning funding)
- Total yield = staking yield + funding yield
Consideration: stETH can depeg from ETH, creating basis risk.
When to Enter and Exit
Entry Signals
- Elevated funding: 0.03%+ per 8h sustained for multiple days
- Bull market conditions: Strong uptrend with retail FOMO
- New narratives: Hype cycles push speculators to leverage long
Exit Signals
- Funding approaching zero: Trade becomes unprofitable
- Negative funding spikes: Market shifting bearish
- Exchange concerns: Any signs of trouble, exit immediately
- Personal risk tolerance: Profits reached target, take them
Market Regime Awareness
Bull markets: Basis trading heaven. Funding consistently positive, often very high. Deploy capital aggressively.
Sideways markets: Modest but consistent returns. Lower funding but still positive most of the time.
Bear markets: Dangerous. Funding can go negative. Consider reverse basis (long perp, short spot) if funding is deeply negative—but this is harder to execute.
Practical Considerations
Tax Implications
Funding payments are likely taxable income in most jurisdictions. Consult a tax professional. The complexity of basis trading with multiple legs and frequent settlements creates accounting challenges.
Operational Complexity
Basis trading requires:
- Active monitoring (at least daily)
- Capital management across venues
- Understanding of margin mechanics
- Ability to act quickly if conditions change
It's not "set and forget." Professional traders have automated systems; retail must be hands-on.
Minimum Viable Scale
Given fees, complexity, and time investment:
- $10K: Barely worth it; fees eat too much
- $50K: Reasonable; can generate $5-15K/year in good conditions
- $100K+: More efficient; better access to OTC rates, optimized execution
Frequently Asked Questions
What is basis trading in crypto?
Basis trading profits from the price difference (basis) between spot and futures/perpetual markets. In crypto, the most common form is funding rate arbitrage: holding spot long and perpetual short to collect funding payments while staying delta-neutral (no price exposure).
What is the funding rate?
Funding rate is a periodic payment between long and short perpetual futures traders. When positive (most common in bull markets), longs pay shorts. When negative, shorts pay longs. It keeps perp prices anchored to spot. Rates are paid every 8 hours on most exchanges.
How much can you earn from basis trading?
Returns vary wildly. In bull markets with strong positive funding, 20-50% APY is possible. In sideways markets, 10-20%. In bear markets, funding often goes negative, and you may pay instead of earn. Historical average is roughly 15-25% APY, but with high variance.
Is basis trading risk-free?
No. Risks include: funding turning negative, exchange counterparty risk, liquidation from position drift, basis risk (positions not perfectly offsetting), and execution slippage. It's lower risk than directional trading but definitely not risk-free.
How much capital do you need for basis trading?
To be meaningful after fees and effort: at least $10,000. Ideally $50,000+. You need capital on both spot (or lending) venue and the perpetual exchange. Smaller amounts get eaten by fees and make the operational complexity not worth it.
What's the difference between basis trade and cash-and-carry?
Cash-and-carry traditionally refers to buying spot and selling fixed-expiry futures, locking in the basis at expiry. In crypto, "basis trade" often means the perpetual funding arbitrage (no expiry). Both are delta-neutral strategies profiting from futures premium.
Which exchanges are best for basis trading?
For perpetuals: Binance, Bybit, dYdX, and Hyperliquid offer deep liquidity. For spot/lending: use reputable exchanges or DeFi lending (Aave, Compound) for the long leg. Avoid sketchy exchanges—counterparty risk is real.
When does basis trading not work?
In bear markets, funding often turns negative—you pay instead of earn. If you're short perps collecting funding and funding flips negative, your trade reverses. Also during liquidation cascades, positions can drift and get liquidated despite being "delta neutral."