Trading the Basis and Funding Curve
Crypto futures of different maturities and perpetual swaps all imply their own funding rate, and plotting them together as a curve reveals where the market is paying the most to be long or short — and where that pricing looks out of line with the others.
Prerequisites: Funding Rate Arbitrage
A single perpetual future has one funding rate. But most exchanges also list dated futures — expiring in one month, three months, six months — each trading at its own premium or discount to spot. Line those up by maturity alongside the perpetual's funding rate and you get a funding curve: a term structure of what it costs, annualized, to be long crypto exposure at each point in time. Just like a bond yield curve, its shape carries information, and a trader can position on the shape itself rather than just on any single point on it.
The funding curve shows the annualized cost of carry at every maturity from the perpetual out to the longest-dated future. A steep curve means the market expects funding to stay elevated; an inverted one signals expected cooling — and the gap between adjacent points can itself be traded, independent of a view on spot price.
Reading the shape
When the curve is upward-sloping — near-term funding modest, longer-dated futures pricing in a bigger annualized premium — it usually reflects expectations that bullish demand for leverage will persist or grow. When it's inverted — near-term funding spiking well above longer-dated implied rates — that's often a sign of short-term, leverage-driven froth that the market expects to cool, sometimes right before it does. A trader can go long the cheaper part of the curve and short the richer part, capturing convergence if the curve flattens, without taking a directional view on where crypto prices go.
Worked example
BTC perpetual funding is running at 45% annualized. The 1-month future implies 30% annualized carry, the 3-month implies 22%, and the 6-month implies 18%. The curve is sharply inverted at the front.
A trader shorts the perpetual (collecting the elevated funding) and buys the 3-month future (paying a lower, fixed implied rate), both against the same spot exposure netted out. If near-term funding compresses toward the 3-month's 22% over the next month — as inverted curves often do once the leverage driving the front end unwinds — the trader captures the difference between the 45% they were collecting and the 22% benchmark, roughly a 23-percentage-point annualized spread, prorated for the holding period, while remaining close to market-neutral on the price of BTC itself.
What this means in practice
Curve trades isolate a bet on the shape of funding rather than its level or on spot direction, which makes them attractive when a trader has a view on leverage conditions specifically — for instance, expecting a deleveraging event to cool an overheated perpetual market — without wanting outright price exposure.
The perpetual leg still requires active hedging and margin management, and funding rates can stay elevated far longer than seems rational during a strong trending market — shorting an inverted curve too early, before the leverage that's driving it actually unwinds, can bleed carry for months before the trade works.
Related concepts
Practice in interviews
Further reading
- Alexander, Deng & Zou (2023), Hedging With Perpetual Futures
- BIS Quarterly Review — crypto derivatives and the cash-and-carry trade