Basis Trading and Funding Rate Arbitrage, Explained
Updated · 2 min read
A basis trade buys an asset in spot and sells it in futures or perps to earn the price gap, without betting on direction. With dated futures you lock in the premium until expiry (cash-and-carry). With perps you collect positive funding while holding spot long and perp short. Returns come from demand for leverage. The risks come from funding flips, liquidation of the short leg and venue failure.
- Cash-and-carry: long spot + short dated future = earn the basis at expiry.
- Funding capture: long spot + short perp = earn positive funding each interval.
- The position is delta-neutral, but the perp leg can still be liquidated if margin is thin.
- Returns shrink when many traders run the same trade; funding can turn negative.
The two versions
| Cash-and-carry (dated futures) | Funding capture (perps) | |
|---|---|---|
| Legs | Long spot, short future | Long spot, short perp |
| What you earn | Futures premium (basis), locked at entry | Funding payments, variable each interval |
| Ends | At expiry, when the basis converges to 0 | Whenever you close |
| Main risk | Margin calls on the short before expiry | Funding turns negative; short-leg liquidation |
Funding capture math
$50,000 each leg, funding averages 0.01% per hour
- Hourly funding received on the short perp: $50,000 × 0.01% = $5.
- Per day: $120. Per 30 days: ≈ $3,600 (≈ 7.2% on $50K notional).
- Minus fees: 4 fills × $50,000 × 0.05% ≈ $100.
- If funding averages the 0.00125%/h baseline instead: ≈ $450/month.
Not usable in most prop accounts
Prop firms ban hedging across accounts or venues. Propr explicitly bans 'hedging via external CEX/DEX'. And fixed-swap firms don't pay you funding at all. Basis trades are a personal-capital strategy.
Frequently asked questions
Is funding rate arbitrage risk-free?
No. It removes price direction risk but leaves funding risk, liquidation risk on the perp leg, exchange counterparty risk and execution costs.
What is the basis in crypto?
The difference between a futures (or perp) price and the spot price, usually quoted as an annualized percentage.
Sources
Educational content, not financial advice. Perps and prop evaluations are high-risk; firm rules change, so check each firm's current terms.