Crypto Gloss

Cash and Carry Trade (Crypto)

Definition:

The cash and carry trade (also called basis trading) is a market-neutral, delta-neutral strategy in which a trader buys an asset on the spot market and simultaneously opens an equal-size short position in a perpetual futures contract on the same asset — profiting from the funding rate paid by long perpetual traders to short holders when the market is in a positive funding rate environment. The spot long and perp short offset each other in terms of price exposure; the remaining return is the net funding rate earned. This strategy was historically the domain of quantitative hedge funds but was popularized in crypto by Ethena Labs, which built a stablecoin (USDe) around it.

How It Works

Step 1 — Open the spread:

  • Buy 1 ETH on the spot market (cost: ~$3,000 at current price)
  • Open a short position of equivalent notional size in the ETH perpetual futures market

Price exposure:

  • If ETH rises $100: spot position gains $100; perp short loses $100 → net P&L = $0
  • If ETH falls $100: spot position loses $100; perp short gains $100 → net P&L = $0

The trade is delta-neutral — price direction does not matter. The position’s value in dollar terms remains approximately constant.

Step 2 — Collect funding:

Perpetual futures use a funding rate mechanism to keep the perp price anchored to the spot price. When perpetual longs outnumber shorts (bullish market sentiment), longs pay shorts a periodic funding fee (typically every 8 hours).

In sustained bull markets, ETH funding rates have historically averaged 10–30% annualized. During peak mania periods (early 2021, late 2024), rates briefly exceeded 100% annualized.

Step 3 — Yield:

The short perp position earns funding continuously. With spot ETH as collateral for the perp short (in integrated platforms like Bybit or via Ethena’s model), the yield is:

$$text{Cash and Carry Yield} approx text{Funding Rate (annualized)}$$

Ethena’s USDe: Institutionalizing the Trade

Ethena Labs built a stablecoin, USDe, by automating the cash and carry trade at scale:

  1. User deposits ETH (or stETH, BTC, etc.) into Ethena.
  2. Ethena opens equivalent short perpetual positions on centralized exchanges (Bybit, Binance, OKX).
  3. The staked ETH collateral earns staking yield; the short perp positions earn funding.
  4. Combined yield is passed to USDe holders who stake for sUSDe.
  5. USDe maintains its peg to $1 because: spot long + perp short ≈ $1 of delta-neutral exposure.

sUSDe APY peaked above 30% during high-demand periods in 2024, making it one of the highest-yielding “stablecoin” instruments — though with risks that differ materially from traditional stablecoins.

Risks

Negative funding rate

Funding rates can go negative — when the market is bearish, shorts pay longs. If negative funding persists, the strategy loses money. Ethena maintains an insurance fund to cover periods of negative funding.

Exchange counterparty risk

Ethena’s short perp positions are held on centralized exchanges. Exchange insolvency (FTX-style) would be catastrophic. Ethena mitigates this via custody with OES providers (Copper, Ceffu, Fireblocks) — collateral is held off-exchange, with only settlement rights at the exchange.

Liquidation risk

If ETH price spikes rapidly, the short perp position could be at risk of liquidation if collateral is insufficient to cover margin requirements. Ethena manages this with conservative margin ratios.

Liquidity risk

During market stress, open interest limits and withdrawal queues can delay unwinding. A bank run on USDe redemptions could require unwinding large perp positions at unfavorable rates.

“Is USDe a real stablecoin?” debate

Critics argue USDe is a yield-bearing investment product that happens to target $1, not a true stablecoin. It is not overcollateralized by independent assets like LUSD or DAI; its stability depends on the delta-neutral hedge holding. This debate intensified during the 2024 BTC spot ETF period when funding rates briefly turned negative.

Historical Context

The basis trade (spot vs. futures) is decades old in traditional finance. It is a standard arbitrage strategy in commodity and equity markets. In crypto, it was primarily used by:

  • Quantitative hedge funds (Alameda Research famously ran this)
  • Market makers offset directional inventory
  • Sophisticated individuals during high-funding periods

Ethena’s innovation was packaging it as a user-accessible yield product with one-click entry.

Related Terms

Sources

Last updated: 2026-04