Introduction

A basis trade is one of the most common ways traders in crypto earn yield without betting on whether Bitcoin, Ethereum, or other tokens go up or down. It’s a market-neutral strategy – meaning the goal is not to profit from price direction, but instead from how the futures market is structured.

Unlike in traditional finance (where basis trades rely on price gaps between spot and futures), in crypto the main driver of returns is the funding rate – payments that exchanges use to balance perpetual futures markets.

How It Works

A crypto basis trade has two legs:

  1. Buy spot crypto (e.g., purchase 1 BTC).
  2. Short perpetual futures for the same asset (sell 1 BTC perpetual contract).

By being long in one market and short in another, the price risk cancels out. The profit comes from the funding payments paid by traders who are on the other side of the futures market.

Funding Rates: The Source of Yield

Perpetual futures don’t expire, so exchanges use funding rates to keep prices close to spot:

  • If more traders are long, the funding rate is positive. Longs pay shorts.
  • If more traders are short, the funding rate is negative. Shorts pay longs.

Most of the time, especially in bull markets, funding rates are positive – meaning basis traders (who short futures) collect payments.

Example:

  • Hold 1 BTC in spot.
  • Short 1 BTC perpetual futures.
  • Funding rate = +0.02% every 8 hours.
  • You collect these payments regardless of BTC’s price direction.

Why It’s Unique to Crypto

  • Traditional markets: Basis trades profit from price differences between spot and futures.
  • Crypto markets: The main driver of profit is funding rate yield, a mechanism specific to perpetual futures.

This makes the crypto basis trade a hybrid of arbitrage and yield farming.

Benefits

  • Market Neutral: Hedged from price moves.
  • Yield Generation: Regular funding payments.
  • Institutional Use: Popular with funds looking for stable returns.

Risks

  1. Funding Rate Flips: Can turn negative in bearish markets.
  2. Exchange Risk: Hacks, insolvency, or sudden rule changes.
  3. Liquidity Risk: Large positions may be hard to unwind.
  4. Opportunity Cost: Capital tied up could miss other opportunities.

Conclusion

A crypto basis trade is a way to earn yield by holding spot crypto and shorting futures, capturing funding payments instead of betting on price. It’s a strategy unique to digital asset markets – one that shows how crypto creates opportunities that don’t exist in the same way in traditional finance.