What is basis trading? The cash-and-carry arbitrage explained

Basis trading is a market-neutral strategy that profits from the price gap between spot Bitcoin and its futures contracts. It is the reason hedge funds hold billions in Bitcoin ETFs without betting on the price going up. Summary Basis trading, also called cash-and-carry arbitrage, involves buying an asset in the spot market and simultaneously selling a futures contract on the same asset, locking in the price difference as profit regardless of which direction the market moves. The strategy became the dominant institutional play in crypto after spot Bitcoin ETFs launched in January 2024, with hedge funds using ETF shares as the spot leg and CME futures as the short leg to capture annualized yields that have ranged from 5% to more than 20%. The “basis” is the difference between the futures price and the spot price. In crypto markets, futures almost always trade at a premium to spot because leveraged traders are willing to pay more for exposure without holding the underlying asset. That premium is what basis traders harvest. Basis trading is not directional. The trader does not profit from Bitcoin going up or down. The profit comes exclusively from the convergence of the futures price ...