What Is the Basis?
The basis is the price difference between a perpetual futures contract and the underlying spot price. Unlike traditional futures that expire and converge at settlement, perpetual futures use funding rates to keep prices anchored to spot.
Despite funding mechanisms, perps often trade at premiums or discounts to spot. This spread—the basis—represents market sentiment and creates tradeable opportunities.
Basis Calculation
Basis = (Perp Price - Spot Price) / Spot Price × 100%Positive Basis (Contango)
Perps > Spot. Bullish sentiment. Longs pay shorts funding.
Negative Basis (Backwardation)
Perps < Spot. Bearish sentiment. Shorts pay longs funding.
Contango vs Backwardation
Market structure (contango or backwardation) reflects aggregate positioning and sentiment. Understanding these regimes helps predict funding rates and basis movements.
Market Structure Characteristics
Contango (Bullish)
- • Perps trade above spot
- • Positive funding rate (longs pay shorts)
- • More speculators long than short
- • Cash-and-carry opportunity: long spot, short perps
Backwardation (Bearish)
- • Perps trade below spot
- • Negative funding rate (shorts pay longs)
- • More speculators short than long
- • Reverse carry: short spot, long perps
Cash-and-Carry Strategy
Cash-and-carry is the classic basis trade: buy spot, sell perps. You're delta-neutral—profiting from funding payments and basis convergence regardless of price direction.
Setting Up a Cash-and-Carry Position
Purchase asset on spot exchange (e.g., 1 BTC at $67,000)
Open equivalent short position on perps (e.g., short 1 BTC at $67,300)
Every 8h, receive funding from longs (positive funding rate)
Exit both legs when basis contracts or funding turns negative
Yield Calculation
If funding averages 0.01% per 8h and basis is 0.5%, annualized yield = (0.01% × 3 × 365) + basis capture = ~10.95% + 0.5% = ~11.45%. In bullish markets, funding can be 5-10x higher.
Execution & Position Management
Leg Execution
Execute both legs as simultaneously as possible to lock in the spread. Use limit orders to avoid slippage. The perp leg is usually more liquid—consider executing it second.
Margin Management
Maintain adequate margin on the perp leg. Price moves against your short don't hurt P&L (spot offsets), but you can still get liquidated if margin is insufficient. Use lower leverage (3-5x).
Monitoring
Track funding rate changes, basis movements, and margin levels. Set alerts for funding rate flips and margin warnings. Rebalance if position sizes drift due to funding accrual.
Risk Management
Key Risks
- • Funding flip: Rate can turn negative, forcing you to pay
- • Liquidation: Sharp price moves can liquidate perp leg despite spot hedge
- • Basis widening: Spread can expand before converging (mark-to-market loss)
- • Exchange risk: Counterparty risk on both spot and perp venues
- • Execution risk: Slippage when entering/exiting large positions
Risk Mitigation
Lower Leverage
Use 3-5x max. Survive drawdowns without liquidation.
Exit Triggers
Close if funding flips negative for 2+ consecutive periods.
Diversify Venues
Split across exchanges to reduce counterparty risk.
Size Appropriately
Ensure you can add margin or close positions without panic.
Advanced Strategies
Multi-Exchange Basis Arbitrage
Different exchanges have different funding rates. Long perps on low-funding exchange, short on high-funding exchange. Capture the funding differential.
Basis Trading + Yield Farming
Use spot as collateral in DeFi lending to earn additional yield. Stack basis returns with lending APY for higher total yield.
Dynamic Basis Allocation
Scale position size with funding rate magnitude. Higher funding = larger position. Exit or flip when funding approaches zero.
Interactive Basis Analyzer
Explore spot-perp spreads and calculate potential yields:
Market Structure
ContangoPerps trading above spot. Bullish sentiment. Cash-and-carry arbitrage opportunity: long spot, short perp.
Basis Trade Yield ($10,000 position)
Basis Trading Strategy
- • Contango: Long spot + short perp = earn funding + basis convergence
- • Backwardation: Short spot + long perp = earn negative funding
- • Delta-neutral: No directional exposure, pure yield play
- • Watch for basis compression during volatility spikes
Related Articles
Frequently Asked Questions
The basis is the difference between perpetual futures price and spot price. Positive basis (contango) means perps trade above spot; negative basis (backwardation) means perps trade below spot. This spread creates arbitrage opportunities.
Cash-and-carry is a delta-neutral strategy: buy spot, sell perps (short) when basis is positive. You earn the basis convergence plus funding payments. No directional risk—profit regardless of whether price goes up or down.
Returns vary with market conditions. In bullish periods, annualized returns can reach 30-50% from positive funding alone. In calm markets, 10-20% is more typical. Backwardation periods offer similar opportunities in reverse.
Main risks: funding rate can flip against you, liquidation risk on perp leg if not properly margined, exchange/smart contract risk, and basis can widen before converging (temporary drawdown). Counterparty risk exists across venues.
You need capital on both sides: spot purchase + perp margin. With 5x leverage on perps, a $10k strategy might need $8k in spot + $2k in perp margin. More margin = safer, less capital efficient. Start with at least $5k to make fees worthwhile.