What is Basis Trading? Bitcoin Cash-and-Carry Arbitrage Explained

Basis trading , also known as cash-and-carry arbitrage, is a market-neutral strategy designed to profit from the price difference between an asset's spot price and its futures contracts. According to Crypto.news, this strategy is employed by hedge funds to hold billions in Bitcoin ETFs without directly betting on the cryptocurrency's price appreciation. It focuses on exploiting temporary discrepancies in pricing rather than directional market movements.

The core principle of basis trading involves simultaneously buying an asset in the spot market and selling an equivalent amount of its futures contracts. The goal is to capture the 'basis,' which is the difference between the futures price and the spot price. When the futures contract expires, the prices are expected to converge, allowing the trader to profit from this convergence, assuming transaction costs are covered. This approach is considered market-neutral because it aims to generate returns regardless of whether the underlying asset's price goes up or down.

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