What Exactly Is Bitcoin Basis Trading?

In traditional markets, “basis” is the difference between a futures price and the current spot price. In crypto, you’ll see two main incarnations:

• Dated futures basis: Quarterly or monthly Bitcoin futures often trade at a premium or discount to spot. The basis converges to zero at expiry.
• Perpetual swap funding: Perps don’t expire, so exchanges use periodic funding payments between longs and shorts to keep perp prices near spot. Positive funding pays shorts; negative funding pays longs (exchange rules vary by venue).

A classic cash‑and‑carry involves going long spot (owning BTC) and going short futures/perps of equal notional size. If futures are above spot or funding is positive, the short side collects the carry that (ideally) exceeds your costs. The position is designed to be delta‑neutral, so P&L should be dominated by carry, not price direction. The word “should” is doing a lot of work—read on for why.

Why Does Basis Exist?

In efficient markets, basis reflects financing, custody, and demand for leverage. In Bitcoin markets, additional forces apply:

• Funding the long: Leveraged traders often want to go long perps, pushing funding positive. Shorts receive those payments.
• Carrying cost and convenience yield: Holding physical BTC involves custody and withdrawal risk; futures avoid on‑chain handling but require margin and impose haircuts.
• Liquidity segmentation: Spot markets (e.g., Canadian exchanges like Bitbuy and Newton, or global venues) and derivatives markets operate under different constraints, producing persistent premiums/discounts.
• ETF flows: Demand shocks in spot ETFs (including those accessible to Canadian investors) can influence spot/futures relationships, especially during large creations/redemptions.
• Interest rate differentials: CAD vs. USD rates, stablecoin borrow costs, and exchange lending markets all affect the fair carry.

Basis is not “free yield.” It compensates someone for providing leverage, inventory, or liquidity under real constraints.

Two Flavors of Carry: Perpetual Funding vs. Dated Futures Basis

Perpetual Swaps (Funding)

Perps use periodic funding to tether the contract to spot. If the perp trades above spot, longs generally pay shorts to incentivize selling pressure that narrows the gap. Funding is quoted as an annualized or per‑period rate and can change materially within hours. It’s path‑dependent: what you collected yesterday does not guarantee tomorrow’s payments.

Dated Futures (Quarterly/Monthly)

Dated futures converge to spot at expiry. If a quarterly future trades at a 6% annualized premium, a long‑spot/short‑future trade theoretically harvests that premium minus costs, assuming you maintain delta neutrality and avoid slippage and forced exits. Execution quality and risk controls decide whether you capture the quoted basis or merely a fraction of it.

Step‑by‑Step: Cash‑and‑Carry with Perpetuals

1. Plan your notional: Decide your BTC size in CAD or USD terms. If you buy 1 BTC spot, you’ll typically short 1 BTC notional in perps. Avoid over‑shorting unless you intend to carry a small negative delta by design.
2. Acquire spot BTC: Use a trusted Canadian on‑ramp (e.g., Bitbuy, Newton) or a global venue. Consider Interac e‑Transfer limits and settlement times; wires may be slower but higher‑limit. Withdraw to a wallet or keep on exchange if you must rehypothecate as collateral (weigh counterparty risk).
3. Short the perp: On your chosen derivatives venue, short the equivalent notional. Use limit orders or passive execution where feasible to reduce taker fees and slippage.
4. Set risk controls: Configure stop‑outs on the derivatives leg only if they won’t force an unhedged spot position in a liquidation cascade. Some traders prefer higher margin and a manual kill switch over tight stops.
5. Monitor funding and basis drift: Track effective funding after fees. Funding can flip negative; be ready to unwind or switch instruments if carry turns against you.
6. Account for borrow and conversion costs: If you fund collateral in CAD, factor in FX spreads to USD or stablecoins, on‑chain transfer fees, and any exchange haircuts on collateral value.
7. Roll or exit: Because perps never expire, you’ll maintain the position as long as funding remains attractive and your operational risk budget allows.

Perps offer flexibility, but your return stream is variable and sensitive to market mood. During risk‑off moves, funding can compress or invert.

Step‑by‑Step: Cash‑and‑Carry with Quarterly Futures

1. Quote the annualized basis: Convert the futures premium/discount to an annualized rate based on days to expiry. Compare it to your realistic cost stack: trading fees, spreads, custody/withdrawal fees, and financing.
2. Long spot, short future: Buy BTC spot and short the nearest liquid future with a clear expiry. Some Canadian traders access institutional futures via domestic brokers (e.g., CME‑linked products) or use crypto‑native derivatives venues. Ensure you understand margin requirements and contract multipliers.
3. Delta checks: Futures may be quoted in contract units, not BTC. Verify you’re short the correct notional to hedge your spot fully.
4. Collateral and haircuts: If you post crypto collateral for futures, learn the haircut rules; if fiat, factor in FX conversion and opportunity cost of cash.
5. Hold to expiry or roll: If you hold to expiry, futures and spot converge; you can close both legs. If you roll, you’ll buy back the near future and short the next, crystallizing or extending the carry.

Dated futures carry can be easier to forecast than funding, but rolls add execution risk and extra fees. Liquidity can also be thinner near expiry windows.

Execution Tactics That Protect Your Edge

• Work a spread, not a leg: Minimize leg risk by executing both sides nearly simultaneously. Consider iceberg or post‑only orders to reduce footprint.
• Use liquidity windows: Crypto liquidity clusters around overlaps of EU/US sessions and during major economic releases. Spreads can be tighter; fills are more reliable.
• Guard against fat fingers: Pre‑trade checks, price bands, and kill switches reduce operational blowups.
• Withdrawal discipline: If you keep significant spot, consider self‑custody with hot/cold segregation. For active hedging, some traders park a small float on exchange and sweep the rest.
• Track realized vs. quoted carry: An internal dashboard comparing expected basis to realized P&L after fees prevents drift into unprofitable territory.

Collateral, Margin, and FX: Practical Notes for Canadians

• CAD‑USD conversions: Many derivatives venues settle in USD or stablecoins. Account for FX spreads both directions. Some Canadian traders maintain USD balances to reduce churn.
• Collateral type matters: Posting BTC as collateral increases liquidation sensitivity to BTC’s price. Stablecoin or fiat collateral can dampen liquidation risk but introduces conversion and counterparty considerations.
• Cross vs. isolated margin: Isolated margin limits blast radius if one position goes wrong. Cross can be efficient but may drag the entire account into liquidation in a sharp move.
• Interac e‑Transfer and wires: Interac can be fast for CAD on‑ramps but has limits and potential holds. Wires often support larger moves but require more lead time; plan around expiry and rollover dates.
• Venue selection: Canadian‑registered platforms may have different product sets than offshore exchanges. Check instrument availability, fee tiers, and compliance requirements before sizing a strategy around any single venue.

Your Real Cost Stack: Don’t Skip the Small Lines

• Trading fees: Maker/taker tiers, derivatives commission, and any borrow/convert fees.
• Slippage and spread: Measure your average effective spread on both legs, not just quoted spreads.
• Funding and roll costs: For perps, funding can flip; for futures, rolling incurs two trades and possibly wider spreads.
• Network and withdrawal fees: On‑chain fees vary with mempool congestion. Time large movements to quieter periods when possible, but never at the cost of missing a critical risk deadline.
• FX costs: Conversions between CAD, USD, and stablecoins add up—track the basis points.

A basis that looks attractive on a dashboard may shrink below breakeven after you include all frictions. Model first, trade second.

Risk Management: What Can Go Wrong?

• Funding inversion: Perp funding can turn negative during risk‑off periods, paying longs instead of shorts. Be ready with thresholds that trigger scale‑down or exit.
• Basis compression blow‑off: Dated futures can go from fat premium to flat in hours if leverage demand collapses. If you overpaid in spreads, the edge disappears.
• Liquidation risk: A sudden price spike against your short can push margin below maintenance requirements, forcing a buy‑in on the futures leg and leaving you unhedged on spot.
• Leg risk: One side fills, the other doesn’t. Use linked or staged orders with size control and clear abort rules.
• Exchange/custody risk: Counterparty failures or withdrawal freezes can trap capital. Diversify venue exposure and keep a crisis playbook.
• Operational risk: API hiccups, UI mis‑clicks, or incorrect contract multipliers have sunk more basis trades than most traders admit.
• Tracking error in proxies: If you substitute a spot ETF for physical BTC, NAV tracking slippage and trading spreads can reduce carry and introduce new risks.

Compliance Snapshot for Canadians

Canadian traders should be mindful of domestic rules and the status of offshore venues. Know Your Client and Anti‑Money Laundering procedures are shaped by FINTRAC guidance. Registered Canadian platforms may impose product and leverage limits. Keep complete records of deposits, withdrawals, and trades, including timestamps, transaction IDs, and statements.

If you rely on multiple exchanges, maintain a simple manifest of where funds reside, who the legal counterparties are, and which entities are foreign. When funding from Canadian banks via Interac e‑Transfer or wire, document memos and confirmations. Good records reduce stress if your bank or platform requests source‑of‑funds documentation.

Tax Considerations in Canada (Educational, Not Advice)

The Canada Revenue Agency (CRA) generally taxes crypto transactions based on their nature and intent. Key points many traders evaluate with a qualified professional include:

• Income vs. capital: Active trading, derivatives use, and short holding periods may tilt treatment toward business income rather than capital gains. The distinction affects how gains and losses are reported.
• Derivatives treatment: Perps and futures are typically treated as derivative contracts; P&L may be recognized as business income. Confirm how your specific activity fits the rules.
• Foreign reporting: If you hold significant assets on offshore platforms, assess whether foreign asset reporting (such as T1135 thresholds) is relevant to your situation.
• Record‑keeping: Preserve trade logs, fee schedules, funding payments, and FX conversions. A detailed trading journal makes tax filing—and strategy evaluation—far easier.
• GST/HST implications: Some business‑level activities can have indirect tax angles; seek professional guidance if you operate as a business.

This article is educational and not tax or legal advice. Always consult a qualified Canadian tax professional about your specific circumstances.

Worked Examples (Illustrative Only)

Perp Funding Example

You buy 1 BTC spot and short 1 BTC notional in a perp. Suppose funding is +0.02% per 8 hours. Over a 30‑day period, your gross carry might look attractive on paper. But net it out: trading fees on both entries, spreads, and any conversion fees to get collateral into the derivatives venue. If funding compresses to +0.002% or flips negative, your realized return may fall below breakeven. Build scenarios where funding is halved and where it inverts; if you still show a margin of safety, the trade is sturdier.

Quarterly Futures Basis Example

You buy 1 BTC spot and short the nearest quarterly future that’s trading at a 4% annualized premium with 60 days to expiry. Your expected gross return is roughly 4% * (60/365). Against that, subtract trading fees, two legs of spreads, anticipated withdrawal and custody costs, and an allowance for a rolled hedge in case you exit before expiry. If your cost stack consumes half the quoted carry, the residual may not justify operational risk.

Build a Lightweight Basis Dashboard

• Live quotes: Track spot, perp index price, perp mark price, funding projections, and dated futures basis in annualized terms.
• Cost model: Inputs for maker/taker rates, withdrawal fees, estimated spreads, and FX rates. Show net annualized after costs.
• Risk dials: Margin utilization, liquidation distance, and position health metrics per venue.
• Compliance notes: Trade IDs, timestamps, and counterparty identifiers for record‑keeping and tax support.
• Alerts: Thresholds for funding inversion, basis compression, or margin ratio breaches that trigger pre‑planned actions.

Standard Operating Procedure (SOP) Checklist

Pre‑Trade

• Confirm instrument availability on both spot and derivatives venues.
• Verify KYC/AML status and funding routes (Interac e‑Transfer vs. wire timelines).
• Calculate expected net carry after all known costs; include conservative scenario analysis.
• Define size, collateral type, isolated vs. cross margin, and liquidation buffer.
• Write down exit/roll conditions and a maximum venue exposure cap.

Execution

• Use post‑only or pegged‑to‑mid tactics where liquid to reduce taker fees.
• Execute near liquidity windows; avoid thin books around illiquid hours.
• Confirm notional match between spot and derivative legs before leaving the desk.
• Snapshot PnL baseline and update the cost model with realized fees.

Monitoring

• Track funding/basis vs. your hurdle rate. If carry dips below threshold, scale down.
• Maintain margin well above maintenance; pre‑plan top‑ups from stable reserves.
• Reconcile balances daily; verify withdrawals landed where expected.
• Log any deviations and update the SOP to prevent repeat errors.

Post‑Trade

• Close both legs in a controlled sequence; avoid stranding inventory on illiquid venues.
• Export trade histories, funding payments, and statements for CRA reporting and performance review.
• Run a post‑mortem: slippage analysis, variance vs. plan, and improvements for the next cycle.

When to Pass on the Trade

• Net carry is thin after realistic costs.
• Collateral must be BTC and pushes liquidation risk uncomfortably high.
• Venue concentration exceeds your counterparty risk limits.
• Operational constraints—like funding delays from your bank—clash with expiry or roll schedules.
• You cannot clearly explain the strategy, risks, and exit plan to an informed peer in a few sentences.

Putting It All Together

Cash‑and‑carry basis trading can complement a diversified toolkit for Bitcoin traders who value process over prediction. The market pays carry because you are providing something scarce—liquidity, inventory, or balance sheet—and taking real risks that must be priced. The edge lies not in spotting a premium on a chart but in consistently capturing it after costs while surviving the inevitable surprises.

For Canadians, the playbook adds local nuances: CAD on‑ramps and bank rails, familiar venues like Bitbuy and Newton for spot, attention to FINTRAC‑shaped compliance expectations, and CRA‑aligned record‑keeping and tax treatment. With conservative sizing, clear SOPs, and disciplined reconciliation, basis trading can become a repeatable, operationally robust strategy—one that prioritizes risk management and realistic execution over bold forecasts.

Educational content only. Not investment, legal, or tax advice.