Basic Structure
Cash-and-carry arbitrage involves buying spot (cash) and shorting an equivalent notional of futures (carry), neutralizing price exposure while capturing basis convergence as profit. Using crypto perpetual futures, basis accrues as funding payments received every 8 hours. During positive-funding regimes (futures at a premium), the short side receives payments that can annualize to 10-50%. The structure mirrors traditional fixed-income repo and commodity carry trades, but in crypto the yield is higher, offset by materially greater counterparty risk.
Perpetual vs. Dated Futures
Using dated futures (e.g., Binance quarterly contracts), the basis at entry locks in a fixed-yield that converges to zero at expiry. Return predictability is high, but roll costs arise at each expiry. With perpetuals, cumulative funding is the return source; it persists as long as funding remains positive but reverses when funding turns negative. Backtests show positive funding dominates over long horizons, yet sharp reversals occur during market stress. Diversifying across multiple assets smooths the return stream.
Practical Risk Factors
First, counterparty risk: when spot and futures collateral are held at the same exchange, insolvency wipes out both legs simultaneously - as occurred during the FTX collapse. Second, stablecoin risk: a USDT de-peg impairs fiat-equivalent returns on the short side. Third, funding reversal: an abrupt shift in market sentiment can flip funding negative, converting carry income into cost. Fourth, liquidation risk: insufficient margin on the short side triggers forced closure, breaking delta neutrality and exposing the position to directional price risk.
Capital Efficiency and Leverage
A common capital-efficiency technique is to hold spot unlevered (1x) while using cross-margin on the short side so the full account balance serves as collateral, keeping effective leverage low and the liquidation price distant. Pushing capital efficiency further, however, thins the liquidation buffer and increases risk of delta-neutral breakdown during cascade liquidation events. The risk-return tradeoff is quantified as 'annualized funding × margin utilization rate,' with the constraint that the liquidation buffer exceeds several multiples of ATR.
Limits and Preconditions
Cash-and-carry arbitrage generating sustained returns depends on the precondition that positive funding dominates over negative - a condition rooted in structural demand for leveraged-long exposure. As markets mature and institutional hedging demand grows, funding may converge persistently toward zero. Portfolios relying on carry as the sole return source therefore carry structural risk. This article is for informational purposes only and does not constitute investment advice. Investment decisions are made at your own discretion.