Bitcoin basis trade

Peter sees bitcoin at 60,000 USD in the spot market, where he can buy it outright. Meanwhile, a futures contract expiring later trades at 61,500 USD. Futures are contracts linked to bitcoin’s price, not extra bitcoin in a wallet. The difference is called the basis: here, futures minus spot, or 1,500 USD. That gap is what Peter wants to trade. Before comparing prices, he needs matching observation times and currencies and a known expiry. Always state the sign convention; elsewhere, basis may be defined the other way round. [1] [2]

In our simplified example, Peter buys 1 BTC for 60,000 USD and opens a short futures position for the same quantity at 61,500 USD. A short gains when futures fall and loses when they rise. Assume a linear dollar calculation and a shared final price of 65,000 USD: bitcoin gains 5,000 USD and futures lose 3,500 USD. Together they leave 1,500 USD before costs. This model assumes holding to expiry and matching final prices; it is not a particular contract specification. Quantity, currency and settlement must actually match. [1]

The 1,500 USD gap relative to the 60,000 USD purchase is 2.5%. With 90 days to expiry, simple annualization gives 2.5% × 365 / 90, or about 10.14% a year. We have only changed the scale to compare maturities. Peter has not earned that annual return. The calculation includes neither compounding nor repeated trades on identical terms, nor all the money committed: besides buying bitcoin, he needs funds to secure the futures position. Costs and the actual capital tied up can substantially change the outcome. [1]

Return to the original trade and imagine closing it early. Bitcoin is now 62,000 USD, but futures are 64,500 USD. Selling bitcoin realizes a 2,000 USD gain; closing the short incurs a 3,000 USD loss. Together that is a 1,000 USD loss before costs. Bitcoin has risen, but the price gap has widened to 2,500 USD, hurting Peter. Expected convergence at expiry does not mean the prices will move closer every day. Leaving early can turn the original plan into a losing trade. [1]

Another possible path for the same trade: spot reaches 70,000 USD and futures 72,500 USD. Bitcoin shows an unrealized gain of 10,000 USD against its purchase price, while the futures short has accumulated an 11,000 USD loss. The broker requires collateral, known as margin, and may demand more. Bitcoin held elsewhere, or its unrealized gain, may not be accepted as funds for the futures account. Peter may therefore have to close before prices converge. Calculating the final outcome correctly is not enough; he must also finance the journey. [1]

Standard CME Bitcoin futures settle in cash against the CME CF Bitcoin Reference Rate, or BRR, a reference price. Peter does not automatically deliver his coins into that contract; our model is also not the standard CME contract size. In the example, the final reference may be 65,000 USD while bitcoin can actually be sold for only 64,900 USD. The combined result then becomes 1,400 USD rather than 1,500 USD, before fees. The gap between the benchmark and an achievable sale price remains an exposure despite the hedge. [3]

With a negative basis, the direction reverses: the trader would sell borrowed bitcoin and buy futures. This is called reverse cash and carry. The bitcoin must later be acquired again and returned to the lender. The screen may show an attractive gap, but borrowing must first be available. Its cost, collateral requirements and possible early recall affect whether the trade can be maintained at all. A negative sign alone therefore does not mean an easily accessible profit or a risk-free trade. [1]

Peter’s example shows why a gross price gap is not net earnings. Financing costs, fees and worse execution prices must be deducted; custody, broker and other counterparty risks remain. The authors of Crypto carry, published by the BIS, explain how margin demands and forced liquidation can obstruct apparently attractive trades. A report of large short futures positions therefore does not automatically show a bet against Bitcoin. The same portfolio may hold purchased bitcoin. What matters is the combined position and the ability to maintain it, not one leg in isolation. [1] [3]