# Funding and Basis Arbitrage

> Funding and basis arbitrage buys crypto spot and shorts perps or futures to earn the premium while staying neutral. Learn the mechanics, returns and risks.

Source: https://learn.tradelabsai.com/crypto/funding-and-basis-arbitrage/  
Track: Crypto · Level: Intermediate · Updated: 2026-10-03  
Publisher: TradeLabs AI (https://tradelabsai.com). Education, not financial advice.  
Cite as: TradeLabs Learn, "Funding and Basis Arbitrage", https://learn.tradelabsai.com/crypto/funding-and-basis-arbitrage/

Funding and basis arbitrage is the crypto version of the classic cash and carry trade. A trader buys an asset on the spot market and shorts the same amount through perpetual futures or dated futures. Price moves on the two legs cancel out, so the position is roughly market neutral. The profit comes from positive funding payments on the short perpetual, or from the futures premium that converges to spot at expiry. It is one of the most popular strategies among crypto funds, and it has also been behind some spectacular failures when its hidden risks were ignored. See [Cash-and-Carry Arbitrage](https://learn.tradelabsai.com/futures/cash-and-carry-arbitrage/) for the traditional version.

## Two versions

| Version | Long leg | Short leg | Earns |
|---|---|---|---|
| Funding arbitrage | Spot | Perpetual futures | Funding payments while funding is positive |
| Basis arbitrage | Spot | Dated futures | The futures premium, locked in until expiry |

## How the funding version works

**Example: Collecting funding**
You buy 2 BTC spot at $80,000 ($160,000) and short 2 BTC of perpetuals at the same price, posting $40,000 of stablecoin margin on the short. Funding averages +0.015% per 8 hours over 30 days.

Funding received: $160,000 × 0.00015 × 3 × 30 ≈ $2,160.
Capital used: $160,000 spot + $40,000 margin = $200,000.
Return for the month: about 1.1%, or roughly 13% annualised, before trading fees.

If Bitcoin rises 10%, the spot leg gains $16,000 and the short loses $16,000, so profit still comes only from funding. But the short leg's margin must stay above maintenance, or it could be liquidated even though the overall position is hedged. See [Funding Rates](https://learn.tradelabsai.com/crypto/funding-rates/).

## How the basis version works

You buy spot and sell a quarterly future trading above spot. At expiry, the future converges to spot, and you earn the difference. The return is known at entry if both legs are held to expiry, unlike funding, which changes every interval. See [Crypto Futures and Basis](https://learn.tradelabsai.com/crypto/crypto-futures-and-basis/).

## Why the opportunity exists

- **Leveraged long demand** pushes perps and futures above spot in bull markets.
- **Arbitrage capital is limited** by custody, regulation and exchange risk concerns.
- **Different investor bases** on spot and derivatives venues.

After US spot Bitcoin ETFs launched in 2024, many funds ran basis trades by buying ETF shares and selling CME futures, which brought more capital into the trade and compressed the basis at times.

## Risks

| Risk | Example |
|---|---|
| Exchange or counterparty failure | FTX's collapse in 2022 trapped funds used in basis trades. See [Market, Credit and Counterparty Risk](https://learn.tradelabsai.com/portfolio/counterparty-risk/) |
| Liquidation of the short leg | A sharp rally drains margin on the short before rebalancing |
| Funding turning negative | Shorts must pay longs, turning income into cost |
| Basis collapse before expiry | Mark to market losses if positions must be closed early |
| Execution and fees | Slippage and fees on both legs eat thin margins |
| Stablecoin or collateral risk | Collateral depegs or is frozen. See [Stablecoins](https://learn.tradelabsai.com/crypto/stablecoins/) |
| Liquidity of the spot asset | Hard to exit large spot positions in small altcoins |

**Watch out: Market neutral is not risk free**
The price risk cancels out, but exchange, margin, funding and collateral risks remain. Several crypto lenders and funds that ran yield strategies collapsed in 2022 when these hidden risks materialised together.

## Running the trade sensibly

1. **Use low leverage** on the short leg and keep extra margin.
2. **Split across reputable venues** to limit exposure to any one exchange.
3. **Monitor funding** and close when it falls toward zero or turns negative.
4. **Account for all costs:** fees, spreads, withdrawal and transfer costs.
5. **Rebalance** as prices move so both legs stay the same size.

## Related products

Some products package this trade. For example, synthetic dollar tokens backed by long spot and short perp positions pay holders the funding income, carrying the same risks in a token wrapper. See [Stablecoins](https://learn.tradelabsai.com/crypto/stablecoins/).

## Frequently asked questions

### What is funding rate arbitrage?

Buying crypto spot and shorting the same amount of perpetual futures to collect positive funding payments while staying hedged against price moves.

### Is basis trading risk free?

No. It removes price risk but leaves exchange failure, liquidation, funding changes and collateral risks.

### Why does crypto basis exist?

Strong demand for leveraged long exposure pushes derivatives prices above spot, and limited arbitrage capital allows the premium to persist.

Next, learn to read blockchain data in [On-Chain Analytics](https://learn.tradelabsai.com/crypto/on-chain-analytics/).

## Continue learning

- Next lesson: [On-Chain Analytics](https://learn.tradelabsai.com/crypto/on-chain-analytics/)
- Previous lesson: [Mark Price vs Index Price](https://learn.tradelabsai.com/crypto/mark-price-vs-index-price/)
- Related: [Mark Price vs Index Price](https://learn.tradelabsai.com/crypto/mark-price-vs-index-price/): Crypto derivatives use three prices: last, index and mark. Learn how each is calculated, why mark price triggers liquidations and why gaps between them matter.
- Related: [Funding Rates](https://learn.tradelabsai.com/crypto/funding-rates/): Funding rates are periodic payments between longs and shorts on perpetual futures. Learn how they are calculated, what extreme funding means and how to use it.
- Related: [Crypto Futures and Basis](https://learn.tradelabsai.com/crypto/crypto-futures-and-basis/): Dated crypto futures trade at a premium or discount to spot called the basis. Learn CME and exchange futures, how to annualise basis and what it tells traders.
- Related: [Cash-and-Carry Arbitrage](https://learn.tradelabsai.com/futures/cash-and-carry-arbitrage/): Cash and carry arbitrage buys an asset and sells its futures when futures are rich versus carry costs. Learn the formula, gold, index and crypto examples, and risks.
- Related: [Arbitrage Strategies](https://learn.tradelabsai.com/strategies/arbitrage-strategies/): Arbitrage strategies try to profit from price gaps between the same or linked assets. Learn the main types, worked examples and why arbitrage is rarely riskless.
- Related: [Market, Credit and Counterparty Risk](https://learn.tradelabsai.com/portfolio/counterparty-risk/): Learn the difference between market risk, credit risk and counterparty risk, how each is measured and managed, and real cases from Lehman Brothers to FTX.