Why Does Spot Market Fragmentation Increase Basis Risk for Crypto Futures?

Spot market fragmentation means the cryptocurrency trades across many different exchanges, each with slightly different prices, liquidity, and trading rules. This makes it difficult to establish a single, true spot price.

Since futures settlement relies on a composite index of these fragmented prices, the basis can become unpredictable, as the underlying spot price used for the index may not perfectly reflect the price on the exchange where the hedger holds their physical crypto.