Cash-and-Carry Arbitrage: Basis vs Funding Capture and Key Failure Points

Cash-and-carry arbitrage is a market-neutral hedge strategy: buy spot in one venue and sell a related derivative in another to capture the spread. In crypto, the spread appears as (1) basis—the gap between spot and futures (contango supports a long-spot/short-futures setup) and (2) funding—perpetual futures’ periodic payments that keep contract prices near the underlying index. For basis trades, the idea is to buy spot and short deliverable or cash-settled futures when futures trade “rich” to spot, then wait for convergence (with profit driven by the initial spread). For funding capture, traders buy spot and short perpetuals when funding is positive, collecting recurring funding payments instead of waiting for an expiry convergence. However, cash-and-carry arbitrage can look safer than it is because returns are highly sensitive to real-world plumbing: financing/borrowing costs, exchange and custody fees, margin requirements, and the risk that the spread compresses before costs are recovered. For funding capture, the key risk is funding durability—positive funding can flip or disappear if crowded positioning unwinds. Where the trade usually breaks: financing pressure, basis compression, funding instability, collateral/liquidation stress on the derivative leg, and venue/counterparty risk when legs run across multiple exchanges or custodians. The article concludes that cash-and-carry arbitrage works best for desks that can actively manage capital and margin; for casual users, the “annualized” carry screen often masks balance-sheet and execution risk.