Basis Trade

Basis trade profits from the price difference between spot and futures markets, exploiting the spread that exists because futures embed expectations about future prices, funding costs, and supply-demand imbalances. In contango (futures above spot), buy spot and sell futures: you lock in a profit equal to the basis, earned as the positions converge at expiration. In backwardation (futures below spot), sell spot and buy futures for the reverse trade. For perpetual futures that never expire, the basis is captured through funding rates rather than convergence. The trade is delta neutral, price direction doesn't matter because long and short positions offset. The risk profile shifts to execution (can you enter and exit both legs cleanly?), funding rate changes (perpetual basis trades depend on funding remaining in your favor), margin requirements (both positions tie up capital), and counterparty risk (the exchange must remain solvent). In traditional finance, basis trades are considered relatively low-risk yield generation. In crypto, the higher typical basis and funding rates create attractive yields, but the operational complexity and counterparty risks are substantial. Institutional players dominate basis trading because they can access the lowest fees, best margin rates, and most reliable execution.