Crypto basis trading is an arbitrage strategy in which a trader profits from the difference between the spot and futures market price.
It originated in the commodity markets (grain) where it is generally used to hedge against bad weather but basis trading can also be a profitable strategy in crypto trading. In the rest of the article we refer to the basis as the difference between the future price and the spot price of the same coin.
Futures are a type of derivative contract in which two parties agree to exchange an asset — or cash equivalent — at a specific price and date (maturity date).
On the maturity date the future price and the spot price will be the same.
We have previously defined the basis as the difference between the futures price and spot price.
Basis (B) = Future price (F) – Spot price (S).
Let’s assume the current date is January 1 2024 and BTCH24 is the future contract on BTC/USD expiring on March 2024. It has 90 days until expiry, i.e. 0.25 years.
F = $30,250
S = $30,230
t = 0.25 years
Basis = ($30,250 / $30,230 – 1) / 0.25 = 0.26% annualized YTY
By selling the basis ( selling the future and buying the spot ) for the March 2024 contract you can lock in a profit of 26%.
The interest paid to finance the spot position is called the cost of carry. (COC = interest rate for margin or founding rate for perpetual).
At maturity your PNL = BASIS – COC.
If you want to read more about this strategy click here.
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