Imagine being able to profit from crypto markets regardless of whether Bitcoin goes up or down. Sounds too good to be true? Welcome to the world of basis trading, a strategy that skilled traders have been using to generate consistent returns in both bull and bear markets.

In this guide, we'll explore how basis trading works in crypto markets, why it's becoming increasingly popular, and how automated solutions can help you implement this strategy effectively.

Whether you're an experienced trader looking to diversify your approaches or someone curious about market-neutral strategies, this guide will help you understand the fundamentals of basis trading and how to get started.

Volatility: from threat to opportunity

If you've been in crypto for any length of time, you know the drill. Bitcoin can drop 20% in a day, altcoins can pump 50% on a random announcement, and memecoins can reach astronomical market caps (example of $TRUMP which surpassed Pepe and Shiba Inu, becoming the second-largest meme coin in a few days).

While these price swings create opportunities for directional traders, they also bring significant risks. Traditional approaches to managing this volatility, like diversification or stop-losses, can help but often feel like putting a band-aid on a broken arm.

Enter basis trading, a strategy that turns market volatility from a threat into an opportunity. As a delta-neutral strategy, it allows you to profit from market inefficiencies rather than price movements. Think of it as being more like a merchant who profits from buying low and selling high simultaneously, rather than a speculator betting on price direction.

What is basis trading?

Basis trading involves taking simultaneous positions in the spot and perpetual futures markets for the same asset. The "basis" refers to the price difference between these two markets. Traders aim to profit from this difference without exposing themselves to the asset's price movements.

When you execute a basis trade, you're not betting on whether the price will go up or down – instead, you're capitalizing on the difference between spot and futures prices while remaining neutral to the overall market direction.

The spot market is when you buy or sell an asset "on the spot" and the futures market involves buying and selling of an asset in the future. The futures market was born from the uncertain nature of agriculture, as a way for farmers and wholesalers to make a deal that benefitted and protected them from good or bad harvests. It's since been used to speculate on or hedge against changing prices on other, more modern type of assets, like crypto.

Picture a forex exchange booth at an airport. You're visiting a foreign country and you want to exchange your euros or dollars for the local currency. The forex exchange makes money from the spread between buying and selling currencies, not from predicting whether the euro will rise against the dollar. Basis trading follows a similar principle – you're profiting from market inefficiencies rather than price predictions.

The advantages of basis trading

Market neutrality: the biggest advantage of basis trading is its independence from market direction. While most traders are endlessly debating whether Bitcoin will go up or down, basis traders can potentially profit either way. This characteristic is particularly valuable in crypto markets, where price prediction is notoriously difficult and there can be price swings, which leads us to...

Reduced volatility: because basis trades are delta-neutral, they typically experience less price volatility than directional trades (eg.: just buying and holding an asset). This can lead to more consistent returns and better sleep at night.

Scalability: basis trading strategies can often handle significant capital without dramatically affecting market prices. This is because you're providing liquidity to both spot and futures markets simultaneously.

How Basis Trading Works: A Practical Example

Let's walk through a real example to understand how this works in practice. But before doing so, we're introducing a new concept, the "perpetual" future. Perpetual futures are like regular futures, but without an expiry date, allowing traders to speculate on the underlying asset prices indefinitely. This is a common instrument used with basis trading, especially in crypto, using the funding rate as the centre piece of the strategy (more on that later).

A simple example

Imagine Bitcoin (BTC) is currently trading at $100,000 in the spot market, while Bitcoin perpetual futures are trading at $101,000.

1. Buy Bitcoin in the spot market at $100,000.
2. Sell Bitcoin perpetual futures at $101,000.

If Bitcoin's price rises to $105,000:

• Your spot position gains $5,000.
• Your futures position loses $4,000.
• Net profit: $1,000 (your locked-in basis spread).

If Bitcoin's price drops to $95,000:

• Your spot position loses $5,000.
• Your futures position gains $6,000.
• Net profit: $1,000 (again, your locked-in basis spread).

The key takeaway? You are not betting on price direction—just the price difference.

That's an example of a basis trade. But did you know there are also two types of trades that make up the delta-neutral strategy? They're the reverse basis and the long/short trade.

Reverse Basis Trading

In a standard basis trade, you go long spot, short futures. In a reverse basis trade, you do the opposite: short spot, long futures (usually via margin trading). This variation is useful when funding rates go negative and shorting spot becomes more profitable.

Long/Short

Another variation of delta-neutral strategies is the Long/Short trade, which involves taking opposing positions in perpetual futures on different exchanges. Instead of using the spot market, a trader goes long the perpetual futures on one exchange while simultaneously shorting the perpetual futures on another exchange. This approach capitalizes on funding rate discrepancies across platforms. If one exchange has a significantly higher positive funding rate, a trader can earn funding payments on the short position while mitigating price risk with the long position. This method requires active monitoring of funding rate spreads but can be a lucrative way to profit from market inefficiencies.

While these examples use simple numbers, executing basis trades in real markets requires good timing and monitoring across multiple exchanges - which is exactly why we developed the Basis Trade eXecutor (BTX).

The BTX automatically monitors opportunities across major exchanges like Binance, Bybit, Bitget, KuCoin, and Woo X, allowing you to execute trades efficiently when profitable opportunities arise.

Real world considerations

In practice, several factors affect your actual profit:

Trading fees: Each exchange charges fees for both opening and closing positions.

Execution timing: Market conditions can change rapidly between spotting an opportunity and executing trades.

Exchange risk: Your positions are split across markets, potentially on different exchanges.

This is where BTX's real-time monitoring and execution capabilities become invaluable. The platform:

• Displays opportunities across supported exchanges, sorted by APR (7, 30, and 90 days)
• Provides clear position monitoring and management
• Implements automated risk warnings (e.g., alerting you to leverage mismatches between exchanges)
• Offers a clean, intuitive interface for tracking your basis trading activities

Funding Rates: key to profits

Funding rates are what make perpetual futures markets tick. Every 8 hours on most exchanges, traders holding long positions pay (or receive) a funding fee to/from traders holding short positions. This mechanism keeps perpetual futures prices tethered to spot prices.

Understanding funding rates is crucial because they represent a significant source of profit in basis trading. When the market is bullish, perpetual futures often trade at a premium to spot prices, resulting in positive funding rates. In these scenarios, traders who are long futures pay funding to traders who are short futures. Conversely, in bearish markets, funding rates can go negative, meaning shorts pay longs.

Let's look at some real numbers. During periods of market optimism, funding rates on a given asset's perpetual futures can reach 0.1% per 8 hours. That's approximately 0.3% per day or roughly 9% per month if rates remained constant (they don't, but this illustrates the potential). Even more conservative funding rates of 0.01% per 8 hours can still yield meaningful returns when leveraged appropriately and compounded over time.

The beauty of funding rates in basis trading is their compound effect:

1. You earn the initial basis spread when setting up the trade
2. You collect funding payments every 8 hours while holding the position
3. You can reinvest these earnings into new basis trades, creating a compounding effect

For example, if you're short $100,000 worth of Bitcoin perpetual futures while holding an equivalent long spot position during a period of positive funding rates:

• At 0.01% per 8 hours: You earn $10 every 8 hours, or roughly $30 per day*
• At 0.05% per 8 hours: You earn $50 every 8 hours, or roughly $150 per day
• At 0.1% per 8 hours: You earn $100 every 8 hours, or roughly $300 per day

*based on a $100,000 position

The BTX helps you capitalize on these opportunities by:

• Monitoring funding rates across all supported exchanges in real-time
• Displaying APR calculations based on historical data (7, 30, and 90-day views)
• Enabling quick execution on these opportunities
• Tracking your accumulated funding payments across all positions
• Alerting you to funding rate changes that may affect your strategy (WIP)

One of BTX's key advantages is its ability to help you identify and compare funding rates across different exchanges. Since funding rates can vary significantly between platforms, this feature helps you maximize your potential returns by choosing the most profitable opportunities available.

Just look at how our discord members are using the BTX:

Things to consider

While the basic concept of basis trading is straightforward, successful implementation requires attention to market impact and liquidity, and risk management.

Market Impact and Liquidity

Basis trading works well with liquid assets on major exchanges. High market cap assets like Bitcoin, Ethereum and Solana typically offer safer opportunities because:

• They have deep liquidity in both spot and futures markets,
• They consistently generate significant funding rates, and because,
• Multiple exchanges offer trading in these assets.

Safer doesn't mean better. While assets like Bitcoin may have more liquidity, often times lower caps may offer better funding rates, and thus, the best opportunities. But this may come with...

Risks

Experienced basis traders usually diversify across multiple exchanges, maintain careful position sizing, keep records of their trades and monitor positions regularly. It's their basis (no pun intended) for good risk management.

While basis trading is market-neutral, it's not risk-free. There are:

• Exchange risks (possibility of exchange failures or hacks)
• Execution risks (slippage when opening/closing positions)
• Funding rate changes (rates can and do fluctuate)
• Black swan events (extreme market conditions that could break usual correlations)

Getting Started with Basis Trading

One of the advantages of basis trading through BTX is its flexibility - you can start with any amount of capital you're comfortable with. Whether you're testing the waters with a smaller amount or deploying significant capital, the platform scales to meet your needs.

To get started:

• Have accounts on supported exchanges (Binance, Bitget, Bybit, KuCoin, Woo X)

• Have USDC or USDT funds these exchanges for trading
• Obtain the Basis NFT from Magic Eden, Solsea or Tensor.

• Connect your wallet that has the NFT to the BTX website (soon you'll need a small amount of $BASIS tokens for platform fees)
• Check opportunities through BTX's intuitive interface

• Begin with smaller positions to familiarize yourself with the platform
• Scale up gradually as you become comfortable with the strategy

Why Automation Matters

While you can do all of this manually, automation through BTX offers several key advantages:

Real-time opportunity detection

• Continuous monitoring across multiple exchanges
• Instant notification of profitable opportunities
• APR calculations based on historical data

Risk management

• Automated warnings for leverage mismatches
• Position monitoring across exchanges
• Clear visibility of your overall exposure

Efficient execution

• Quick response to market opportunities
• Simultaneous position management across exchanges
• Reduced risk of manual errors

Time savings

• Automated monitoring replaces manual exchange checking
• Consolidated view of all positions
• Streamlined trade execution process

Conclusion: is basis trading right for you?

Basis trading is a sophisticated approach that can generate consistent returns regardless of market direction. While it requires more setup and understanding than traditional trading, the potential for steady, market-neutral returns makes it an attractive strategy.

Remember that like any trading strategy, basis trading requires risk management and proper execution to be successful. Take time to understand the mechanics thoroughly before committing real capital, and consider using specialized tools to help manage your positions effectively. This is why we created the BTX and our discord where other traders share their strategies (members only).

As crypto continues to mature, strategies like basis trading are likely to become more important for sophisticated traders looking to generate consistent returns while managing risk.

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.