What Exactly Is “Basis” in Bitcoin?

In futures markets, the basis is the difference between a futures contract price and the spot price. If the futures contract trades above spot, the market is in contango; if it trades below spot, it’s in backwardation. Bitcoin’s basis reflects expectations about funding costs, borrowing and lending rates, demand for leverage, and the time value of carrying Bitcoin until a given settlement date.

Two terms you’ll hear often:

• Term structure: The curve formed by plotting basis across multiple expiries (e.g., 1‑month, 3‑month, 6‑month futures). A rising curve suggests contango; a downward curve indicates backwardation.
• Annualized basis: A normalized way to compare basis across different time frames. Traders often evaluate whether the annualized basis compensates for fees, slippage, margin, and operational risk.

Cash‑and‑Carry: The Core Market‑Neutral Play

The most common Bitcoin basis strategy is the cash‑and‑carry. You buy spot Bitcoin and simultaneously sell a futures contract with the same notional exposure. If the futures price is above spot (contango), your short futures position should converge toward spot as the contract approaches expiry. The difference—less all costs—is your gross basis capture.

Step‑by‑Step Mechanics

1. Identify a futures contract with positive basis relative to spot (e.g., a 3‑month contract trading above the spot price).
2. Buy spot Bitcoin on a trusted, liquid venue. Canadian traders often use registered platforms that support CAD funding via Interac e‑Transfer or wire.
3. Sell an equivalent notional amount of the chosen futures contract on a regulated or reputable exchange or broker.
4. Hedge size precisely. Strive for delta‑neutrality so PnL primarily comes from basis convergence, not directional moves.
5. Hold until expiry (or exit earlier if the basis collapses to your target). As expiry nears, futures and spot typically converge.

How to Calculate Basis

Let S be the spot price and F be the futures price. The raw basis is F − S. The percentage basis is (F − S) / S. To compare opportunities across tenors, annualize it:

Annualized Basis ≈ ((F − S) / S) × (365 / days_to_expiry)

Example: Suppose spot is 58,000 and a 92‑day future trades at 59,160. The basis is 1,160 (2.0%). Annualized, 2.0% × (365/92) ≈ 7.9% before costs. Your job is to subtract all frictions and risks to judge whether that spread is worth carrying.

Costs You Must Net Out

• Trading fees: Maker/taker fees on spot and futures legs.
• Funding/borrow: If you borrow capital or BTC, include interest or borrow fees. If you use perpetual swaps instead of dated futures, include funding payments.
• Withdrawal and network fees: On‑chain transfer costs for moving BTC between venues; can spike during high mempool congestion.
• Margin costs: Opportunity cost of collateral and any interest on margin balances.
• Taxes: Realized PnL may be taxed differently depending on your jurisdiction and whether activity is considered business income or capital gains.

Reverse Cash‑and‑Carry: When Futures Trade Below Spot

In backwardation, you may consider shorting spot while buying futures. This is trickier because shorting spot Bitcoin requires borrowing BTC or using instruments that provide short exposure. Alternatively, some traders approximate the spot leg with a spot Bitcoin ETF and then go long futures—though ETF management fees, tracking error, and borrowing costs for ETF shorting can erode the spread. Reverse basis trades are more operationally complex; many traders simply wait for favorable contango instead.

Dated Futures vs Perpetual Swaps

Bitcoin markets offer two main derivatives for basis work:

• Dated futures: These have fixed expiries (e.g., monthly or quarterly). Basis converges mechanically into expiry. You’ll map opportunities along the term structure and can plan rolls on a calendar.
• Perpetual swaps: These never expire but use a funding rate that periodically transfers value between longs and shorts to anchor the perp to spot. A "+carry" is earned or paid through funding rather than by time‑to‑expiry convergence. Perps are convenient but add funding uncertainty.

Many basis traders prefer dated futures for predictability and to avoid funding‑rate surprises, while others mix perps and dated contracts to express views across both mechanisms.

Venues, Access, and Canadian Considerations

Spot Leg

For Canadian traders, the spot leg is commonly executed on Canadian‑registered platforms that support CAD deposits via Interac e‑Transfer, wire, or bill pay. Names you’ll often see include Bitbuy, Newton, NDAX, and other compliant platforms. Evaluate each for liquidity, fees, withdrawal policies, and security controls.

Futures Leg

You can access Bitcoin futures through regulated futures brokers or crypto‑native exchanges. Consider contract specs (size, tick, margin), collateral types (USD, USDT, USDC, BTC), liquidity, and risk protections (auto‑deleveraging, insurance funds). Traders seeking conventional oversight often look at exchanges listing cash‑settled Bitcoin futures, whereas active crypto venues may offer tighter spreads and more flexible collateral at the cost of different risk profiles.

Compliance Snapshot for Canadians

• Know‑Your‑Customer (KYC) and FINTRAC: Canadian platforms registered as money services businesses follow FINTRAC guidance. Expect identity verification and, in some cases, enhanced due diligence for higher limits.
• CRA tax obligations: Keep accurate records of every trade, conversion, and fee. The Canada Revenue Agency may treat active trading and derivatives PnL as business income rather than capital gains. Classification depends on your facts and circumstances—consult a qualified professional.
• Foreign holdings: If you hold significant assets on foreign platforms, be aware of potential reporting obligations and keep meticulous documentation.
• Funding methods: Interac e‑Transfer is convenient but can have limits, holds, and cut‑off times. Wire transfers may be better for larger sums but take longer and incur higher fees. Build realistic settlement timelines into your trade plan.

Margin, Collateral, and Liquidity: The Operational Core

Basis trades are deceptively simple on paper but operationally demanding. Your futures leg will require initial and maintenance margin; adverse moves can trigger variation margin or liquidations if you run too hot. Because the strategy is market‑neutral, it’s tempting to lever up—but margin calls can arrive at the worst moments (e.g., during exchange outages or network congestion).

• Collateral choices: Cash collateral tends to be the cleanest for managing PnL and taxes. Crypto‑collateralized positions are convenient but introduce mark‑to‑market volatility in your margin buffer.
• Liquidity overlap: Execute the spot and futures legs on venues with reliable depth. Spreads widen during macro data releases, weekends, holidays, and risk events. Track when your chosen venues are typically most liquid.
• Withdrawal discipline: If you keep spot on an exchange, monitor proof‑of‑reserves/operational transparency, use strong security (hardware keys, 2FA), and define thresholds for moving assets to self‑custody.

Risk Management: What Can Go Wrong?

• Basis compression risk: The spread can shrink unexpectedly long before expiry. If you sized too aggressively or costs rose, your edge may vanish.
• Roll risk: If you roll a position (sell the near‑month and buy the next), the far‑month basis might be less attractive. Plan your roll schedule and thresholds in advance.
• Funding spikes (perps): If you use perps, funding can flip or surge. Stress‑test your PnL for adverse funding scenarios.
• Margin/liquidation: Large directional moves can pressure your collateral. A market‑neutral book can still be liquidated if collateral is inadequate or trapped by operational bottlenecks.
• Operational and exchange risk: Outages, API failures, wallet maintenance, and unexpected policy changes can delay execution or withdrawals. Maintain redundancy across venues and networks.
• FX exposure for Canadians: If your futures leg settles in USD while your capital is in CAD, you may have unintended currency risk. Consider hedging FX or consolidating your base currency.
• Tax and classification risk: Misclassifying activity or neglecting record‑keeping can lead to disputes. Keep an audit‑ready trail of entries, exits, fees, and conversions.

Taxes and Record‑Keeping: A Practical Overview for Canadians

From a Canadian perspective, basis trading can generate different types of income. If your activity resembles a business—high frequency, organized, profit‑oriented—PnL may be treated as business income. Spot dispositions and derivatives settlements can have separate tax treatments, and interest or lending returns may be classified differently again. Because classification depends on individual circumstances, seek guidance from a CPA familiar with digital assets.

• Track Adjusted Cost Base (ACB): Maintain ACB for spot Bitcoin and any ETF units used. Record every purchase, sale, and fee in CAD terms on the trade date.
• Derivatives PnL: Keep clear logs of realized/unrealized PnL, settlement dates, and the CAD exchange rate used for conversions.
• Fees and interest: Separate exchange fees, borrow interest, funding payments, and network fees for accurate reporting.
• Documentation: Save statements, confirmations, and API exports. Consistency and completeness reduce headaches later.

Tip: Build a monthly “tax pack” that snapshots positions, realized PnL, basis at entry/exit, and all fee schedules. It’s easier to maintain than to reconstruct at year‑end.

A Practical Playbook: From Idea to Execution

1) Screen and Compare

• Pull spot prices from your intended spot venue and futures prices across multiple expiries.
• Compute raw and annualized basis for each tenor. Rank opportunities after estimated costs.
• Check liquidity (order book depth, typical spread, recent outages). Favor contracts with healthy open interest and consistent volume.

2) Build a Costs Model

Create a simple spreadsheet that inputs S, F, days to expiry, fees, expected funding/borrow, and withdrawal costs. Have it output net annualized basis after all frictions. Include stress‑tests: What happens if fees rise 25% or funding flips against you?

3) Size Conservatively

• Target a margin buffer that survives multi‑standard‑deviation moves. If your collateral is crypto‑denominated, increase the buffer further.
• Define max leverage per venue and a portfolio‑level leverage cap. Keep emergency reserves in stable collateral.

4) Execute the Legs Efficiently

• Use limit orders where possible to reduce taker fees and slippage. During volatile windows, accept partial fills rather than chasing.
• Execute legs in quick succession or use conditional orders to minimize basis drift during entry.
• Document entry timestamps so you can reconcile future PnL with your plan.

5) Monitor and Maintain

• Track margin levels and liquidation prices in real time. Set alerts.
• Review the term structure daily. If the basis collapses to your target return, consider early exit.
• Plan rolls one to two weeks ahead of expiry. Compare roll costs versus closing out.

6) Close or Roll

If holding to expiry, ensure you understand settlement mechanics (cash‑settled vs physically delivered). If closing early, unwind both legs promptly to avoid residual exposure.

ETF‑Based Basis: A Canadian Twist

Canada offers multiple spot Bitcoin ETFs. Some traders pair a long spot ETF position with a short futures leg to approximate a cash‑and‑carry without handling self‑custody. This can simplify operations but introduces new variables: ETF management fees, tracking error, market spreads, and potential borrow costs if you short the ETF instead. Always weigh these frictions against the advertised basis.

• Pros: No hot‑wallet risk for the spot leg, straightforward CAD accounting, easy to hold in certain registered or taxable accounts depending on your broker’s policies.
• Cons: Ongoing MER, possible premium/discount to NAV, and limited after‑hours liquidity compared with 24/7 crypto markets.

Common Mistakes to Avoid

• Ignoring the total cost stack: A 6–8% annualized basis can vanish after fees, funding, slippage, and taxes.
• Under‑hedging: A tiny mismatch in notional can turn a neutral strategy into a directional bet during large moves.
• Annualizing too aggressively: Annualized figures are for comparison, not a promise of linear returns. Event risk is lumpy.
• Weak operational planning: No fallback venues, thin margin buffers, slow withdrawals, and relying on a single API are recipes for stress.
• Tax neglect: Failing to reconcile trades regularly leads to year‑end chaos and potential misreporting.

Simple Formulas and a Mini‑Checklist

Quick Math You’ll Use Often

• Raw basis: F − S
• Percent basis: (F − S) / S
• Annualized basis: ((F − S) / S) × (365 / days_to_expiry)
• Net basis (est.): Annualized basis − fees − funding/borrow − expected roll costs

Pre‑Trade Checklist

• Term structure mapped and chosen tenor documented
• Venue liquidity, margin, and fee schedules confirmed
• Collateral location and withdrawal timelines verified
• Delta‑neutral sizing computed and cross‑checked
• Stop‑trade criteria if basis compresses unexpectedly
• Tax logging template ready (ACB, PnL, FX rate)
• Roll plan or expiry settlement plan written down

Execution Tips and Microstructure Nuances

• Time‑of‑day effects: Cross‑venue liquidity often improves during overlapping global sessions. Avoid thin books when entering sizable positions.
• Maker vs taker mix: On liquid venues, you can leg in with passively posted orders. In volatile conditions, use taker orders sparingly to complete the hedge quickly.
• Anchored VWAP/volume profile: Use these to gauge fair execution zones and avoid chasing temporary dislocations.
• Network congestion: If your strategy depends on moving spot BTC between venues, monitor mempool conditions and fee markets to prevent settlement delays.
• Redundancy: Maintain accounts at multiple spot and futures venues, with tested funding paths, so you can migrate quickly during incidents.

When to Stand Down

One hallmark of professional basis traders is discipline about not trading. If the net basis after costs and realistic risk premia doesn’t clear your hurdle rate, skip it. Markets are cyclical; spreads widen and tighten as leverage demand and liquidity conditions change. Protecting capital and operational bandwidth is often the smartest decision.