What Is Basis Trading in Crypto?

The “basis” is the difference between a crypto asset’s futures price and its spot price. When futures trade above spot, the market is in contango; when they trade below spot, it’s backwardation. Basis trading seeks to capture that difference while neutralizing directional exposure to the underlying coin.

In practice, basis strategies aim to be delta‑neutral: you hedge your spot exposure with an offsetting derivatives position. That way, your P&L is primarily driven by funding payments (perps) or the futures’ convergence to spot (dated futures), not by the coin’s price direction.

Why Basis Opportunities Exist in Crypto

Crypto markets are 24/7, fragmented across venues, and feature diverse participants—from retail momentum traders to market makers and institutional hedgers. Demand for leverage and directional exposure can push perpetual funding positive (longs paying shorts) or negative (shorts paying longs), often in bursts around narratives, listings, or macro events. Similarly, dated futures can trade at notable premiums during bullish phases as traders pay up for forward exposure. These persistent imbalances create harvestable basis—if you structure and manage the trade carefully.

A Canadian Lens: Access, Compliance, and Practicalities

Canadian traders typically acquire spot exposure through registered, Canadian‑operated platforms that follow know‑your‑client and anti‑money‑laundering rules under FINTRAC oversight. Well‑known Canadian platforms like Bitbuy and Wealthsimple Crypto focus primarily on spot trading and custodial access. For derivatives (perpetuals, dated futures, and options), many Canadian residents access regulated venues abroad that admit Canadian clients or use institutional channels. Availability varies by province, client category, and platform policy—always verify eligibility and requirements before trading derivatives.

Strategy 1: Cash‑and‑Carry Using Perpetual Swaps

The perp cash‑and‑carry is a classic delta‑neutral setup: buy spot, short the perp with equal notional, and collect funding when it’s positive. If funding flips, you may pay—so monitoring and risk controls are essential.

Step‑by‑step construction

1. Acquire spot: Buy the underlying (e.g., BTC or ETH) on a Canadian spot platform or a venue you trust. Track fees and the exact filled quantity.
2. Short the perp: On a derivatives exchange, short the same notional amount using isolated margin to contain risk. Ensure your position size matches your spot holdings to stay near delta‑neutral.
3. Monitor funding windows: Funding typically accrues at set intervals (e.g., hourly or every 8 hours). Your P&L from funding equals rate × notional × time, minus trading fees and borrowing costs.
4. Risk management: Keep a buffer of quote currency (e.g., USDT/USDC) to avoid liquidation due to price spikes and temporary basis widening. Automate alerts for funding swings.
5. Exit: Close both legs. Ideally, use a single “close out” workflow to reduce legging risk and slippage.

Illustrative example (hypothetical numbers)

When this shines

• Hot narratives and leverage demand push perp funding strongly positive (longs paying shorts).
• You have low fees, tight spreads, and can trade passively as a maker.
• You can source spot efficiently in CAD and hedge in USD‑quoted perps with minimal FX drag.

Risks to manage

• Funding flips: Funding can turn negative quickly, causing you to pay. Use stop‑loss policies for the strategy itself (e.g., close if 24‑hour funding turns net negative beyond a threshold).
• Exchange risk: Diversify venue exposure; use subaccounts; avoid excessive leverage.
• Index and premium spikes: Temporary dislocations can pressure margins. Maintain buffers.
• Borrow costs & fees: Account for all fees, including maker/taker, withdrawal, and conversion costs.

Strategy 2: Cash‑and‑Carry Using Dated Futures

Dated futures (e.g., quarterly) typically converge to spot at expiry. If a futures contract trades at a premium, a trader can buy spot and short that future, locking in the premium and holding to settlement, provided all costs are controlled.

Step‑by‑step construction

1. Identify the premium: Measure futures − spot. Annualize: ((F − S) / S) × (365 / days to expiry).
2. Put on the trade: Buy spot S; short futures F for equal notional.
3. Hold to expiry: As the contract converges to spot, you realize the locked‑in basis, minus fees and financing costs.
4. Roll or close: If you don’t want settlement, you can close early when basis decays to your target, or roll the short to a later month.

Illustrative example (hypothetical numbers)

When this shines

• Strong bull phases where dated futures command a consistent premium.
• Institutional flows concentrate in specific expiries, creating predictable curve shape.
• You prefer known carry (futures premium) over uncertain perp funding.

Risks to manage

• Basis collapse: Premiums can compress quickly; if you’re forced to exit early due to margin or operational issues, captured basis may be smaller than expected.
• Liquidity around roll/expiry: Spreads can widen; plan exits and rolls with limit orders or algorithms.
• Settlement mechanics: Understand cash vs. physical settlement, mark‑to‑market rules, and potential auto‑deleveraging on leveraged platforms.

Strategy 3: Calendar Spreads (Same Coin, Different Expiries)

A calendar spread is a relative value trade between two futures maturities (e.g., long near, short far). It targets the shape of the curve (contango/backwardation), not spot direction. For example, in strong contango you might short the richer far‑month and go long the cheaper near‑month, aiming to profit as the spread normalizes.

Construction and management

• Define the spread: F_far − F_near (contango) or F_near − F_far (backwardation). Choose your quotation consistently.
• Size both legs so the trade is duration‑hedged (vega‑like exposure to curve shifts minimized).
• Use limit or pegged orders to avoid slippage on the legs; many venues offer dedicated spread books.
• Set risk limits on the spread variance (e.g., max adverse basis move) rather than outright price.

Measuring Returns: From Gross to Net

Basis returns can look attractive on paper. The real edge is in turning them into net returns after fees, funding variability, financing costs, and slippage.

Core components to model

• Trading fees: Maker/taker for both spot and derivatives legs.
• Financing/borrow: Costs to borrow stablecoins or cash; opportunity cost of capital locked as margin or spot.
• Funding variability (perps): Use historical distributions, not just current prints.
• Slippage: Model conservative impact especially when legging into volatile markets.
• FX costs: CAD↔USD conversions add drag; reduce round‑trips when possible.

Execution Tactics for Canadian and Global Traders

Before you trade

• Pre‑fund accounts to avoid timing risk while transferring between CAD spot and derivatives venues.
• Rehearse the workflow with a tiny size to calibrate fees and fills.
• Use subaccounts to segregate basis strategies from directional trades.

Order placement

• Enter both legs with limit orders when possible; consider passive posting to earn maker rebates.
• For size, use algorithms (e.g., VWAP/TWAP) or iceberg orders to minimize footprint.
• Avoid legging during funding prints, top‑of‑the‑hour volatility, or major data releases.

Monitoring

• Dashboard key metrics: funding forecast, realized funding, basis vs. entry, margin utilization, and P&L attribution.
• Set alerts for funding spikes, sudden spread moves, or index disruptions.
• Rebalance notional if price drifts create meaningful delta due to uneven leg sizes.

Risk Management: Don’t Let “Low Risk” Fool You

Basis trading is often marketed as “market‑neutral,” but that doesn’t mean “risk‑free.” The risks are more operational and structural than directional.

Major risk buckets

• Counterparty/venue risk: Exchange failures, withdrawal pauses, or liquidation engine anomalies. Diversify venues and avoid excessive leverage.
• Funding/basis regime shifts: Funding can invert; futures premiums can vanish. Use stop policies at the strategy level and accept that occasional small losses protect capital.
• Liquidity & slippage: Wide spreads or thin order books increase costs; test fills before scaling.
• Index/pricing risk: Understand how your derivatives venue calculates the index and handles outliers or exchange outages.
• Stablecoin & FX risk: Stablecoin depegs and CAD/USD volatility can impact collateral value and final returns.
• Operational risk: Mis‑sized legs, forgotten funding windows, or incorrect expiries. Use checklists.

Canadian Tax and Record‑Keeping Essentials

From a Canadian perspective, accurate records are non‑negotiable. The Canada Revenue Agency (CRA) generally treats crypto as a commodity; the tax character of gains depends on your circumstances. Funding receipts, futures P&L, and FX gains/losses may be income or capital in nature depending on intent and activity. This is not tax or legal advice—consult a qualified professional—but you can streamline compliance with disciplined documentation.

What to track for each basis trade

• Date/time, venue, and order IDs for both legs.
• Filled quantities, prices, and all fees (spot and derivatives).
• Funding payments (received/paid) by interval.
• Futures roll dates, expiries, and settlement details.
• CAD value at transaction time and any FX conversions.
• Net result per trade and cumulatively, with attribution.

Putting It Together: A Basis Trading Playbook

1) Identify opportunity

• Scan perp funding across major venues; look for persistently positive (or negative) rates.
• Check dated futures premiums/discounts; evaluate the annualized basis vs. your friction model.
• Assess liquidity: depth at 1–5 bps from mid, average spread, and fill quality at your size.

2) Model net return

• Funding/futures carry scenarios: base, bear, bull.
• All fees and projected slippage.
• Capital efficiency: margin requirements and collateral haircuts.

3) Execute with precision

• Enter both legs close in time; use conditional or bracket orders where available.
• Prefer maker orders; avoid chasing during volatility spikes.
• Verify delta neutrality post‑fill; rebalance if needed.

4) Monitor and adapt

• Daily check: realized funding/basis vs. model; variance limits.
• Adjust or exit if regime changes (e.g., funding flips for multiple intervals).
• Roll futures ahead of expiry to avoid liquidity crunches.

5) Close and reconcile

• Flatten both legs, confirm fills, and calculate net outcome.
• Export statements and update your journal for CRA reporting.

Frequently Asked Questions for Canadian Traders

Do I need a derivatives account to run basis?

Yes. Perp cash‑and‑carry and dated futures strategies require a venue that lists derivatives. Availability to Canadian residents depends on the platform’s policies and your province. Many traders source spot on Canadian exchanges and hedge on an admitted derivatives platform.

Is this risk‑free?

No. While delta is hedged, you still face exchange risk, funding/basis swings, liquidity constraints, and operational errors. Treat basis as a professional strategy with guardrails, not a set‑and‑forget yield farm.

What size should I start with?

Small enough that a 2–3× adverse move in funding or a sudden basis shift won’t trigger liquidation or force an early exit. Scale only after you can reconcile results cleanly for several weeks.

How do taxes work in Canada?

Tax outcomes depend on individual circumstances. Funding receipts and futures P&L may be income or capital; accurate records are essential. Consult a Canadian tax professional familiar with crypto and derivatives.

A Final Word on Strategy Fit

Basis trading suits traders who value process, patience, and precision. It’s less about predicting price and more about operational excellence—getting the venue, sizing, and controls right. Canadian traders can combine the reliability of domestic spot platforms with carefully selected derivatives venues to construct robust, compliant strategies.