Long/Short trading: your guide to cross-exchange profits
Long/Short trading is simultaneously opening a long position on one exchange and a short position on another exchange for the same asset.
Looking for a way to generate consistent crypto returns regardless of market direction? Welcome to the world of Long/Short trading, a powerful strategy that lets you profit from market inefficiencies across different exchanges.
In this guide, we'll explore how Long/Short trading works, why it's becoming increasingly popular among traders, and how automation can help you execute this strategy effectively.
Understanding Long/Short Trading
At its core, Long/Short trading involves simultaneously opening a long position on one exchange and a short position on another exchange for the same asset.
- Long is when you go long on an asset: if its price increases, you make money.
- Short is when you go short on an asset: if its price decreases, you make money.
Of course, if the situation is reversed — you're long and price decreases; you're short and price increases —you lose money instead.
The goal with the Long/Short trade is to be long and short on the same asset so as to create a market-neutral position that can generate steady returns through funding rate differentials, regardless of whether the underlying asset's price moves up or down.
Think of it like being a smart arbitrageur who profits from price differences between markets, except instead of profiting from price disparities, you're capitalizing on funding rate differences between exchanges. This approach has become increasingly interesting as crypto markets have matured, with traders using automated systems to capture these opportunities efficiently.
Longs and shorts
The Long/Short makes use of a type of derivatives trading, the perpetual future.
- going long means buying the asset's perpetual future contract;
- going short means selling the asset's perpetual future contract.
This isn't as hard as it sounds, and it'll become clearer soon.
How Long/Short Trading Works
Let's walk through a practical example using Bitcoin (BTC) to understand how this strategy works in real life. Before moving on to the example, just know that when funding rates are positive, longs pay shorts; when funding rates are negative, shorts pay longs.
You don't need to memorize this or even know what funding rates are or their underlying mechanism, at least for for now, as it will become clearer as you progress through the examples in the article. Even if you forget most of this, don't worry, as there is an automated way of doing these trades without having to worry about these concepts. Let's move on with the example.
Suppose you've identified an opportunity where:
- Exchange A has a negative funding rate for BTC (shorts paying longs),
- Exchange B has a positive funding rate for BTC (longs paying shorts).
In this scenario, you would open a long position on Exchange A, where you'll receive funding payments, and simultaneously open a short position on Exchange B, where you'll also receive funding payments.
Imagine you invested $100 in total for this: it's $50 for the long and $50 for the short. In trader lingo, we call it opening a Long/Short for $100, with $50 for each leg. A "leg", in our example, is the perpetual future contract you open on an exchange. For the Long/Short trade, you open two legs: one long, one short.
By matching the position sizes exactly, you create what traders call a "delta-neutral" position – meaning your profit or loss isn't affected by the underlying price movement of Bitcoin.
The beauty of this strategy lies in its market neutrality. Whether BTC price goes up or down, your profit remains the same because any gain in one position is offset by an equal loss in the other. This allows you to focus entirely on capturing funding rate differentials, which can provide steady, predictable returns regardless of market conditions.
So if a gain in one position is offset by an equal loss in the other, how do we make money?
With funding rates.
The Power of Funding Rates
Understanding funding rates is important for successful Long/Short trading.
Funding rates are periodic payments exchanged between long and short position holders on perpetual futures markets, typically occurring every 8 hours (varies per exchange). What makes this strategy interesting is that funding rates can vary significantly between exchanges, creating opportunities for profit.
Let's look at a concrete example to understand how these profits accumulate. Suppose you've identified the following scenario:
- Exchange A has a funding rate of -0.01%, meaning shorts are paying longs. This is common during market downturns or periods of pessimism.
- Exchange B has a funding rate of +0.02%, indicating longs are paying shorts, which often occurs during bullish periods or when there's high demand for leverage.
With a $100,000 position size, here's how your returns would be:
- From Exchange A, your long position earns you 0.01% every 8 hours, or $10 per funding period.
- From Exchange B, your short position earns you 0.02%, or $20 per funding period.
Combined, you're earning $30 every 8 hours, which translates to approximately $90 per day or $2,700 per month, assuming rates remain constant (they typically fluctuate, but this illustrates the potential of this strategy).
What's good about this approach is the compound effect over time. As you accumulate funding payments, you can reinvest them into larger positions, potentially increasing your returns. Also, because funding rates tend to be more predictable than price movements, this strategy often provides more consistent returns than directional trading (aka just buying spot).
The Role of Automation in Long/Short Trading
While the concept of Long/Short trading is straightforward, executing it effectively in real-time markets presents several challenges. This is where automation becomes important, and why we've developed the Basis Trade eXecutor (BTX) to handle the complexities of this strategy.
Consider what's needed to execute this strategy manually: you would need to constantly monitor funding rates across multiple exchanges, quickly execute trades when opportunities arise, manage your positions to ensure they remain balanced, and track your accumulated funding payments. Now multiply this by several trading pairs across major exchanges we support (Binance, Bybit, Bitget, KuCoin, and Woo X), and you can see why automation isn't just helpful – it's essential.
BTX addresses these challenges through sophisticated monitoring and execution capabilities. The platform continuously tracks real-time funding rates across supported exchanges, calculating potential returns and identifying the most profitable opportunities. When an attractive opportunity appears, you can execute both sides of the trade quickly and efficiently, ensuring you capture the full potential of the funding rate differential.
On top of that, BTX's risk management features help protect your positions. The platform provides real-time monitoring of your positions across exchanges, alerting you to any potential issues such as leverage mismatches or significant funding rate changes that might affect your strategy.
Getting Started with Long/Short Trading
One of the most appealing aspects of Long/Short trading is its accessibility. Unlike some trading strategies that require large amounts of capital to be effective, you can start with whatever amount you're comfortable with and scale up as you gain confidence and experience.
Make sure to have accounts set up on the exchanges you plan to trade on. BTX currently supports integration with:
Sign-up through the links above if you would like to support the DAO.
These are all major exchanges known for their liquidity and reliability — and there are more to come. You'll need to have USDC or USDT available on these exchanges to begin trading.
Once your accounts are set up and funded, connecting them to the BTX is straightforward. The platform's intuitive interface makes it easy to monitor opportunities and manage your positions.
We have an easy follow-along documentation to help you use the BTX for your automated Long Short trades. Visit docs.basis.markets and you'll get up to speed fast.
We recommend starting with smaller positions as you familiarize yourself with the mechanics of Long/Short trading and the BTX platform. This allows you to understand how funding payments work, how positions behave under different market conditions, and how to use BTX's features effectively.
What's a small position? Depends, but you could go with $100, and it will open $50 on each leg. More on that later.
Automate Long/Short with the BTX
Sign up for the exchanges we support: Binance, Bitget, Bybit, KuCoin, and WOO X (with more coming).
Enable futures and margin in those exchanges. Without futures trading, you won't be able to trade in perpetual futures. In our connection guides you'll find a step-by-step on how to connect exchanges to the BTX, including signing up for them, enabling futures, creating APIs and connecting them to the BTX.
You will need a Basis NFT to use the BTX, which you can get on Magic Eden, Solsea or Tensor
With the Basis NFT in your Solana wallet (we recommend Phantom) login to the https://btx.basis.markets.
After logging in, you'll be in the in the Opportunities tab of the dashboard, where the magic happens.
Filter the Trade Type to show Long Short trades.
Let's pick ACH/USDT for this example. Clicking on the pair shows a detailed view of this opportunity, sliding down more information about this opportunity.
Click the Execute button and a new pane shows up.
Go with the default settings for this example, and put in a small size, such as $100. This will open a position with a total of $100, with $50 for each leg: $50 for the Long on KuCoin; $50 for the Short on WOO X. Then click the Execute Trade button.
After executing it, a notification slides from the left lower corner of the screen confirming that your position is open.
Click on it to go straight to the detailed view of the position you opened to monitor this position. Alternatively you can go to the Positions tab, find our position and click on it to see its detailed view.
Congratulations 🎉🥳
You just created a Long Short via the BTX, where you are:
- Long the perpetual of this asset on Exchange A (KuCoin)
- Short the perpetual of this asset on Exchange B (WOO X)
Notice the $99.39 value. The BTX attempted to use our $100 size we entered in the execution pane, however it didn't match it exactly because it filled Leg 1 and Leg 2 with a notional volume of the asset for the size we gave it. In other words, it bought as close as possible to $100 of the asset (1300 + 1300 ACH) in a way that both legs have the same amount.
Now what? How do you profit from this?
From the funding rate differentials.
Suppose Exchange A, our Long, has a -0.4% funding rate, while Exchange B, our Short, has a -0.3% funding rate.
Both funding rates are negative in this example, so shorts pay longs. Here's a refresher:
You are:
- long on Exchange A (-0.4% funding), so shorts pay you.
- short on Exchange B (-0.3% funding), so you pay longs.
Exchange A (Long Position): With a funding rate of -0.4%, the negative rate means that shorts pay longs. So as a long, you receive funding equal to 0.4% of your position size.
Exchange B (Short Position): With a funding rate of -0.3%, the negative rate again implies that shorts pay longs. Since you are short here, you have to pay 0.3% of your position size as funding.
- On the long side, you earn +0.4%
- On the short side, you pay -0.3%
- Therefore, your net benefit is 0.4% - 0.3% = 0.1% per funding interval.
You’re capturing a positive funding differential of 0.1% of $50 = $0.05 total across both legs (remember you opened a $100 trade size, half to each leg), because the funding difference is what you profit from, and that difference applies only once to your notional amount of $50.
Funding rate periods vary in exchanges, but they're usually 8 hours. In this example, your total profit is $0.05 every 8 hours.
That doesn't seem like much, but it adds up over the course of days, weeks and months. Funding rates will vary, but this illustrates the potential. Also, your profit would be higher if you had used a higher position size ($1000 or $10,000 instead of $100) and/or if you went for a trade with a higher funding rate differential.
That's why the BTX is so convenient: you can check in the Opportunities tab for potential lucrative positions to enter. You spot an opportunity, you execute it with size, you enter the trade while minimizing slippage and simultaneously opening both legs, and you can monitor it from the convenience of one single dashboard.
Isn't that amazing?
Risk Management
As you become more comfortable with basic Long/Short trading, you can begin opening more positions with higher amounts invested. Experienced traders sometimes manage multiple positions across different trading pairs, taking advantage of varying funding rate opportunities while spreading their risk.
Note that while Long/Short trading is market-neutral, it isn't risk-free.
There are:
- exchange risks;
- technical risks;
- market risks.
Let's go through each one.
Exchange risk is perhaps the most significant one – you're trusting exchanges to handle your positions properly and remain operational. This is why we recommend and work with well-established exchanges that have secure API keys and maintain strong security practices. As a trader and crypto user, you should follow good security guidelines as well.
Technical risk is another consideration in Long/Short trading. While the BTX automates many aspects of the execution process, maintaining adequate margin levels across exchanges is important. Market conditions can change rapidly, and while your overall position may be delta-neutral, individual exchanges still require proper margin maintenance. The BTX is working towards helping you manage this risk as we're developing warning systems that alert you when positions approach critical levels, giving you time to adjust before potential issues arise.
Market risk, while minimized through the delta-neutral nature of Long/Short trading, still requires attention. Severe market conditions can lead to temporary funding rate anomalies or liquidity issues. For instance, during periods of high volatility, funding rates might spike dramatically on one exchange while remaining relatively stable on another. While these situations can create interesting opportunities, they may also signal underlying market stress that requires careful position management.
Understanding market dynamics becomes particularly important as you scale your positions. For example, during the March 2020 crypto market crash, some exchanges experienced temporary service disruptions due to high volatility. Traders who had spread their positions across multiple exchanges were better positioned to weather this storm than those concentrated on a single platform.
Don't put your eggs all in the same basket.
This type of scenario illustrates why BTX's multi-exchange support isn't just about capturing opportunities – it's also an important risk management feature.
Building Your Long/Short Trading Strategy
Starting with smaller positions allows you to learn the mechanics without significant risk. As you gain confidence and understand how funding rates behave across different market conditions, you can gradually increase your position sizes.
You might want to start with a $100 position ($50 on each leg's exchange) to understand the mechanics. After becoming comfortable with how things work, you may want to scale up to $200, $1000 or more, noticing how larger positions affect execution and funding rate capture. Scaling gradually like this allows you to develop an intuition about market dynamics while building confidence in your execution.
BTX's interface makes this scaling process more manageable by providing clear visibility into your positions across all connected exchanges.
Optimizing Your Trading Through BTX
BTX's automation capabilities are great for managing multiple positions across different trading pairs. The platform's interface provides a comprehensive view of your positions, funding rates, and opportunities, enabling you to make informed decisions quickly. This becomes more valuable as you scale your strategy and need to monitor multiple positions simultaneously.
For example, imagine monitoring funding rates across five exchanges for three different trading pairs. Manually tracking these 15 different rates and their relationships would be pretty hard and time consuming. BTX aggregates this information into an intuitive interface, helping you identify the most profitable opportunities while maintaining awareness of your overall position risk.
The platform's warning system represents another layer of optimization. Rather than constantly monitoring margin levels and position sizes manually, we are developing alerts into the BTX so that it notifies you when positions require attention. This proactive approach to risk management allows you to focus on spotting new opportunities and building other positions without worrying about your current ones.
Looking Ahead: The Future of Long/Short Trading
As crypto markets continue to mature, strategies like Long/Short trading are likely to become increasingly sophisticated.
The introduction of new trading pairs, exchange features, and market dynamics will create fresh opportunities for traders who are well-positioned to capture them. BTX's ongoing development aims to stay ahead of these market evolution, providing traders with the tools they need to execute effectively in an ever-changing landscape.
Conclusion
Long/Short trading is a sophisticated approach to generating consistent returns in crypto markets, regardless of overall market direction. While the strategy's concept is straightforward – capturing funding rate differentials while maintaining market neutrality – successful execution requires attention to detail and good risk management practices.
BTX's automation and monitoring capabilities make this strategy accessible to traders of all experience levels: from those starting with modest positions to sophisticated operators managing substantial portfolios across multiple exchanges. With proper risk management, gradual scaling, and good use of automation tools like the BTX, the Long/Short can become a valuable component of your trading arsenal.
Join the community at discord.basis.markets. If you have the Basis NFT, you'll be able to access the members area, where other users share their trades.
Disclaimer: This article is for educational purposes only and should not be considered financial advice. Trading cryptocurrency involves significant risk of loss. Please conduct your own research and consider your personal circumstances before trading.