A basis trading strategy involves simultaneously taking opposing positions in a spot market and a derivatives market for the same asset. This approach seeks to profit from the difference, or basis, between the asset’s current price and its future price. Traders aim to capture the convergence of these prices as the derivative contract approaches its expiration. It is a market-neutral approach that reduces directional price risk.
Context
Basis trading is a common arbitrage technique in traditional finance that has found new relevance within cryptocurrency markets, especially with the growth of perpetual futures and other derivatives. The strategy’s effectiveness in crypto is influenced by market volatility, funding rates, and the liquidity of various exchanges. Participants monitor the basis closely, adjusting positions to capitalize on pricing disparities while managing counterparty and exchange risks.
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