Cash and carry trade strategy in cryptocurrencies: arbitrage guide and profitability

The cash and carry trade represents one of the most widely used arbitrage strategies in modern cryptocurrency markets. It is a sophisticated approach that seeks to profit from valuation discrepancies between assets traded on the spot market and their corresponding futures contracts or perpetual swaps. This methodology allows traders to generate predictable gains while maintaining neutral positions regarding market direction, regardless of whether prices rise or fall.

Fundamentals of the cash and carry trade: key concepts

A cash and carry trade operates by executing two inverse transactions simultaneously in different markets. The trader purchases the asset in the spot market at its current price, while simultaneously opening a short position in the futures market or a perpetual swap contract. This setup of opposing positions creates what professionals call a “market-neutral strategy.”

The beauty of this approach lies in the fact that profitability does not depend on the directional movement of the underlying asset’s price. Instead, gains come solely from the price discrepancy between the two markets. When a futures contract is traded at a price higher than the spot price of the same asset, the market is in a condition known as contango, creating natural opportunities for these arbitrages.

The mechanism is simple but effective: as the futures contract’s settlement date approaches, both prices inexorably converge. The initial spread between them gradually narrows, allowing the trader to close both positions with a profit equal to the original price difference, minus commissions and financing costs.

Futures arbitrage: the spread as a key metric

The width of the spread between the spot price and the futures price directly determines the potential profit of the operation. Experienced operators constantly monitor these price gaps for attractive opportunities.

Consider a practical example: a trader notices on August 1 that Bitcoin is trading at 25,000 USDT on the spot market, while the futures contract for settlement on September 1 is trading at 25,200 USDT. The trader buys 1 BTC on the spot market at the current price and simultaneously sells 1 futures contract at 25,200 USDT.

After a month, regardless of Bitcoin’s actual price movement, the outcome is predictable. If Bitcoin reaches 30,000 USDT, the spot position yields a 5,000 USDT profit, while the short futures position incurs a loss of 4,800 USDT, resulting in a net gain of 200 USDT. If the price drops to 15,000 USDT, the spot position loses 10,000 USDT but the short futures gains 10,200 USDT, again producing a 200 USDT profit. Even if the price remains unchanged, the trader earns the initial spread of 200 USDT.

This example illustrates the fundamental principle: the flow of profits comes from the initial spread, not from speculation on the price direction. The convergence of prices at settlement turns the theoretical profit into realized gains.

Perpetual swaps and funding rates: additional opportunities

Beyond fixed-date futures contracts, traders can implement cash and carry strategies using perpetual swaps, which lack a specific settlement date. This feature creates both opportunities and distinct challenges.

With perpetual swaps, the spread between the spot price and the contract price may take longer to adjust, and in volatile markets like cryptocurrencies, price reversions can temporarily invert the price relationship. However, there is an additional income mechanism exclusive to these instruments: the funding rate.

The funding rate functions as periodic payments between market participants, designed to keep the perpetual’s price aligned with the underlying spot price. When the perpetual trades above the spot price, the rate is positive, and long position holders make payments to short position holders. Conversely, when the perpetual trades below the spot, the rate is negative, and short holders pay longs.

A trader holding 1 BTC in their trading account (long spot position) while selling a perpetual swap (short position) in a context where the perpetual trades above the spot receives periodic funding payments. These income streams accumulate as long as the position remains open, adding to the profit from eventual price convergence. This combination of spread income plus funding payments makes perpetual swaps particularly attractive during certain market cycles.

Structural characteristics of a valid operation

Any cash and carry trade strategy must meet specific structural criteria to be considered genuine arbitrage:

• It must involve exactly two different financial instruments
• One instrument must necessarily be in the spot market
• The second instrument must be a futures contract or a perpetual swap
• Positions must be exactly opposite (one buy, one sell)
• The amount of the underlying asset must be identical on both sides
• Execution must be simultaneous or nearly so to minimize market risk

Deviating from this structure turns the operation into something other than arbitrage, typically a directional speculation with significantly higher risks.

Risk analysis in carry trade operations

Although cash and carry trades are often promoted as “low risk” strategies, there are important considerations traders must understand before implementing them.

Locked capital and opportunity cost: Executing these operations requires locking up capital for extended periods, often from one week to a month depending on the chosen settlement date. This capital is unavailable to seize potentially more profitable opportunities that may arise in the market. For active traders, this restriction represents a significant opportunity cost.

Reduced spreads relative to position size: In relatively efficient markets, spreads between futures and spot are usually narrow. For arbitrage to be profitable after accounting for commissions and financing costs, large position sizes are required, exacerbating the issue of capital immobilization.

Imperfect execution risk: Although the strategy is technically market-neutral, if one of the two instruments does not execute while the other does, the trader is exposed to unexpected directional risk. Additionally, rapid market movements can cause execution prices to differ significantly from expected prices, eroding already slim margins.

Liquidation risk when using leverage: Many traders use leverage on futures positions to reduce required capital. While logical in theory, this introduces liquidation risk. If the price moves adversely, the leveraged position could be liquidated, turning a riskless arbitrage into a tangible loss.

Complexity with perpetual swaps: Perpetual swaps add complexity. Without a guaranteed convergence date, the spread may not close favorably over long periods. If the market shifts from contango (perpetual trading above spot) to backwardation (the opposite), the trader could face extended periods where closing the position results in losses, as well as missing profitable opportunities in other assets.

Carry trade strategy in volatile contexts

Cryptocurrencies are known for their extreme volatility, but paradoxically, this can benefit carry trade operators. Large, frequent price movements tend to widen spreads unpredictably, creating more attractive opportunities than those typically seen in established, liquid markets.

Additionally, the relative inefficiency of crypto markets compared to traditional financial markets means price discrepancies persist more often and for longer durations. For institutional traders and high-net-worth investors, these inefficiencies represent a consistent source of profitability, especially when the overall market direction remains uncertain and other strategies are difficult to implement profitably.

Execution considerations and risk mitigation

To successfully execute a cash and carry trade, simultaneous execution of both instruments is critical. Given crypto markets’ volatility, sequential execution penalizes traders.

Operators can reduce imperfect execution risk by:

• Using platforms that support block orders or combined executions of multiple instruments
• Placing tightly bracketed limit orders around the target spread
• Breaking large orders into smaller tranches to reduce market impact
• Actively monitoring spreads before execution to ensure market conditions remain favorable
• Employing execution algorithms when available to optimize timing and prices

Trading commissions also deserve special attention. Since commissions are typically paid on both sides (buying spot and selling futures), and possibly also when closing the spot position, these can significantly impact profit margins. Choosing exchanges with competitive fee structures is essential.

Practical application: cash and carry in multiple scenarios

The viability of the cash and carry trade varies with market conditions. During bullish euphoria, futures often trade at significant premiums over spot, maximizing opportunities. During panic or uncertain periods, these premiums can disappear or invert, making inverse carry trades (buying futures, selling spot) the preferred strategy.

Sophisticated traders constantly monitor spread ratios and funding rates across multiple exchanges and asset pairs, executing trades only when risk-reward ratios are favorable. With Bitcoin, Ethereum, and other major assets, opportunities regularly arise, though they require quick identification and execution.

Profitability of the cash and carry trade: conclusions

The cash and carry trade remains a grounded and reliable method for extracting returns from price inefficiencies between spot and derivative markets. Its ability to generate returns independent of price direction makes it especially valuable during periods of market uncertainty.

However, success requires a deep understanding of spread mechanisms, funding rates, execution costs, and risk management. It is not a passive strategy nor suitable for inexperienced operators. Genuine opportunities demand rapid identification, precise execution, and constant monitoring.

For traders who master these complexities, the crypto market offers arbitrage opportunities more attractive than many established markets. When implemented correctly, the cash and carry trade systematically and consistently exploits these inefficiencies.