What ETH basis is, and why it can be traded

At any given moment, ETH dated futures and spot ETH usually trade at different prices. Futures minus spot is the basis. When the market is upbeat, more people want to go long through futures, so futures trade above spot and the basis is positive.

Dated futures have an expiry date, and at expiry the futures price meets the spot price, so the basis goes to zero. A cash-and-carry trade uses this: buy spot ETH and sell the same amount of dated futures. Whether ETH then rises or falls, one side gains and the other loses, roughly cancelling out, and at expiry you keep the basis you locked in when you opened.

Here is an example with made-up numbers, not today’s prices. Spot at 2,500 USDC and a three-month future at 2,540 USDC gives a basis of 40 USDC, about 1.6%. That is 1.6% over three months, or roughly 6.4% a year, before fees.

There are three main risks.

First, the basis can widen before it narrows. That shows up as a paper loss along the way, so you need enough margin to sit through it.

Second, the futures side is traded on margin. If ETH rallies hard, the short needs more margin, or it can be liquidated.

Third, the funds sit on an exchange, so the exchange itself is a risk.

Orchid ETH Basis on our platform follows this approach. ETH’s basis moves around more than BTC’s, so returns are a little higher and exits are harder to time.