What Is “Basis Risk” in the Context of Cryptocurrency Derivatives Hedging?

Basis risk is the risk that the price of the asset being hedged (e.g. spot Bitcoin) does not move perfectly in line with the price of the hedging instrument (e.g. a Bitcoin option or futures contract). This often occurs due to differences in expiration dates, contract specifications, or underlying market dynamics.

A non-zero basis means the hedge will not perfectly offset the loss, leaving a residual exposure.