Backpack levels up the Basis Trade with yield from multiple sources. Instead of only earning the Funding rate of the Perpetual Futures short positions, you also earn yield on lent collateral.
Spot and Perp markets usually operate in tandem and are not exposed to movements of the markets, making basis trade positions delta neutral.
What is Basis trading?
A common trading strategy amongst institutional or HNW individuals in crypto is to hold a spot long position in one currency and then short an equal and opposite amount on the perpetual future contract. The aim here is to profit from the funding rate on the perpetual future contract while having no directional pricing risk because any gain on the spot long will be offset by a loss on the perpetual short, and vice versa.
You can see from this chart that on the majority of days there is a positive funding rate on the Perpetual Future contract. This means that longs ‘pay’ funding and shorts are ‘credited’ funding. On the days when funding is negative, the opposite is true.
- As 90%+ of days have positive funding, over a long time horizon the funding trade achieves relatively low but near risk-free yield.
This example uses BTC as the asset, on Backpack the basis trade can be applied to any market with a perpetual future.
What parts of the Basis trade create profit and loss?
Spot Long BTC
The price of BTC can go up or down and as such creates a positive or negative PnL for the holder.
Short BTC Perpetual
The price of BTC can go up and down and the Perpetual will broadly move in parallel, and as such creates a positive or negative PnL for the holder.
- Note: For the holder of the basis trade, the movements on the Spot Long and the Perpetual Short will broadly offset and as such the net PnL for these two parts should be zero.
Funding Rate on the BTC Perpetual
When the funding rate on the perpetual is positive, this means that long perpetual positions are paying funding and short perpetual positions are receiving funding. When the funding rate is negative, the opposite is true.
As funding is positive far more often than it is negative, over a longer time horizon the short BTC perpetual position will always be a net receiver of a funding credit.
Why are Basis Trades more efficient on Backpack?
Interest on Lent BTC
There is a unique feature on Backpack that enables lent assets to continue to be used as collateral for other margin or futures activity.
As such, the Spot Long BTC position can be put into the lending pool and the holder earns this yield. This is an additional element of PnL that does not exist on other centralized exchanges and is possible due to the unique ‘cross-margin per subaccount’ setup of Backpack’s margin system.
Do you have questions or require further information?
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