How Does Basis Trading (Arbitrage) Work between the Spot and Futures Markets?
Basis trading, or arbitrage, involves simultaneously taking an opposite position in the spot market and the futures market to profit from the temporary price difference (the basis). For example, if the futures price is significantly higher than the spot price, a trader would buy the spot asset and sell the futures contract.
When the basis converges (ideally to zero at expiration), the trader closes both positions, profiting from the initial price difference with minimal risk.
Glossar
Basis Arbitrage
Arbitrage ⎊ is a quantitative trading strategy exploiting the price differential, known as the basis, between a cryptocurrency's spot price and its corresponding futures contract price.
Basis Trading
Arbitrage ⎊ Basis trading, within cryptocurrency and derivatives markets, exploits temporary mispricings between the spot and futures contracts of an underlying asset, aiming for risk-free profit.
Spot Market
Definition ⎊ The Spot Market is the financial venue where cryptocurrencies or other underlying assets are traded for immediate settlement, meaning the exchange of the asset and cash occurs almost instantaneously at the prevailing market price.
Funding Rate
Mechanism ⎊ Funding Rate represents a periodic payment exchanged between traders holding opposing positions in perpetual futures contracts, establishing an equilibrium between contract prices and the underlying spot market.
Futures Market
Leverage ⎊ Futures markets, within the cryptocurrency and broader financial derivatives landscape, represent agreements to buy or sell an asset at a predetermined price on a specified future date, functioning as a risk transfer mechanism and enabling price discovery.