A cash and carry trade is an arbitrage that buys an asset in the spot market and simultaneously sells a futures contract on the same asset, capturing the difference between the two prices while holding no net exposure to the asset's direction. Price moves cancel between the two legs. What is left is the spread — and in the classical version, that spread is realised when the futures contract converges to spot at expiry.
The structure is roughly as old as organised futures markets. It exists in commodities, where it funds the warehousing of physical goods; in US Treasuries, where it is one of the largest sources of hedge fund leverage; and in crypto, where the futures leg is usually a perpetual contract that never expires at all. The mechanics differ in each market in one specific way — where the return comes from — and that difference is the whole subject of this article.
Cash and Carry Is Not the Carry Trade
These two terms are confused constantly, including in search results, and they describe different things.
- The carry trade — most often the FX carry trade — borrows in a low-yielding currency and invests in a higher-yielding one. The return is the interest rate differential. It is a directional bet: it carries real exposure to the exchange rate, and it unwinds violently when that rate moves.
- Cash and carry is an arbitrage. It is long the asset and short a derivative on the same asset, so the directional exposure is hedged out by construction. The return is a spread between two prices of the same thing, not a differential between two different things.
One takes a view and gets paid for the risk. The other takes no view and gets paid for the structure. Everything below concerns the second.
The Original: Commodities and the Cost of Carry
In commodity markets, a futures price in normal conditions sits above the spot price. The gap reflects the cost of carry — what it costs to hold the physical asset until the delivery date: storage, insurance, financing, spoilage where relevant.
That gap is the trade. A participant who can store the commodity more cheaply than the market is pricing buys it in the spot market, sells the futures contract, stores it, and delivers against the contract at expiry. The return is the basis, and it is known at entry, because both prices are observable and the delivery date is fixed.
This is why the trade exists at all: it is not a market inefficiency so much as a service. The arbitrageur is being paid to warehouse the asset between now and the delivery date, and the basis is the fee for doing it.
The Institutional Version: The Treasury Basis Trade
The same structure, applied to government bonds, has become one of the most consequential trades in global markets.
In the Treasury cash-futures basis trade, a fund buys a cash Treasury security and sells the corresponding Treasury futures contract, financing the bond position in the repo market. As the futures contract approaches delivery, cash and futures prices converge, and the position earns the difference.
Why Leverage Is Required There
The Treasury basis is extremely narrow — a few basis points. To turn that into a meaningful return, the position is levered, often heavily, through repo financing that is rolled continuously. The US Treasury's Office of Financial Research has documented both the size of these positions and what happens when they unwind under stress, in its brief on basis trades and Treasury market illiquidity.
Two features of that version matter for the comparison. The return comes from convergence on a known date, and the leverage comes from repo, which introduces rollover risk: the financing has to be renewed continuously, and it is renewed at whatever rate prevails.
The Crypto Version: Spot Long, Perpetual Short
The crypto version holds the asset in spot and sells a perpetual futures contract against it. The directional exposure cancels exactly as before. Two things are different.
What Replaces Convergence
A perpetual contract has no expiry date, so there is no convergence event to capture. In its place, the contract uses a funding payment exchanged between long and short holders at each settlement interval — typically every eight hours — to keep its price anchored to spot. The short leg of the position receives that payment whenever the rate is positive.
So the return does not arrive at a delivery date. It arrives in instalments, three times a day, for as long as the position is held and the rate stays positive. We cover the calculation and timing of that payment in how the funding fee works, and why removing the expiry changes a position's behaviour in perpetual futures vs traditional futures.
What Replaces Repo
There is no repo leg. The spot asset is held outright, and the perpetual short requires margin posted at the venue rather than financing borrowed against the asset. That removes rollover risk at the financing level and replaces it with something else: venue and collateral risk. The margin has to be sufficient to absorb adverse moves on the short leg without triggering liquidation, and it sits at an exchange rather than in a repo market.
One Trade, Three Markets
| Commodity cash and carry | Treasury basis trade | Crypto perpetual carry | |
|---|---|---|---|
| Long leg | Physical commodity | Cash Treasury security | Spot crypto asset |
| Short leg | Dated futures contract | Treasury futures contract | Perpetual futures contract |
| Source of return | Basis, realised at delivery | Convergence, realised at delivery | Funding payments, received each interval |
| Return known at entry? | Largely — basis and date are both observable | Largely — subject to financing cost | No — variable and can invert |
| Financing structure | Own capital or credit | Repo, rolled continuously | Exchange margin on the short leg |
| Horizon | Fixed by the delivery date | Fixed by the delivery date | Open-ended |
| Principal risk | Storage and delivery logistics | Repo rollover and margin spirals | Rate inversion, liquidation, venue exposure |
The pattern across the three is consistent: the same hedged structure, with the return mechanism and the financing arrangement swapped out for whatever the market in question provides.
Why the Crypto Version Behaves Differently
The crypto version trades a known return for an open-ended one, and that is the central trade-off.
In commodities and Treasuries, the arbitrageur knows at entry roughly what the position pays and when it ends. The uncertainty sits in the financing and the execution. In the perpetual version there is no end date, so the position can be held as long as it remains attractive — but the income is variable and observable only one interval ahead, and if positioning in the market flips, the funding rate turns negative and the position begins paying rather than receiving.
That is not a defect of the structure. It is the price of removing the delivery date, and it is why the crypto version requires active management where the dated versions require a calculation at entry. What the position actually demands — sizing, hedge maintenance, collateral buffers, venue selection — is set out in our delta-neutral strategy overview, and the full construction of the perpetual version in our guide to funding rate arbitrage.
It is also worth being clear about what has not changed. The basic proposition — hold the asset, sell the derivative, collect the spread, take no directional view — is the same proposition institutional desks have run in commodities for a century and in Treasuries for decades. The crypto instance is new. The trade is not.
What Can Go Wrong in Each Version
Each market breaks the trade in its own way, and the failure modes are instructive precisely because they are different.
- Commodities: storage capacity, delivery logistics and quality specifications. The arbitrage assumes the physical asset can actually be held and delivered as the contract requires.
- Treasuries: repo rollover and margin. Because the basis is narrow, the trade is levered, and leverage turns a small adverse move into a forced sale. The OFR's work on March 2020 documents exactly this dynamic, and it is the reason regulators watch the position size.
- Crypto perpetuals: rate inversion, liquidation on the short leg, and counterparty exposure to every venue involved. Funding that turns negative converts income into cost. Collateral that proves insufficient during a sharp move triggers liquidation on the hedge, which leaves the spot leg unhedged at the worst possible moment.
None of these are exotic. They are the ordinary operating risks of running a hedged position, and in every version of the trade the difference between a good implementation and a poor one is how they are bounded rather than whether they are present.
Frequently Asked Questions
Is a cash and carry trade risk-free?
No. It removes directional exposure to the asset, which is a specific and limited claim. It does not remove financing risk, execution risk, margin and liquidation risk, counterparty risk, or — in the perpetual version — the risk that the funding rate inverts and the position starts paying out. Hedged is not the same as riskless.
What is the difference between cash and carry and reverse cash and carry?
Cash and carry is long the asset and short the future, and it is used when the future trades at a premium. Reverse cash and carry is the mirror image — short the asset, long the future — and applies when the future trades at a discount to spot. In crypto, the reverse structure corresponds to periods of negative funding.
Why does the crypto version not need a delivery date?
Because the perpetual contract uses a funding payment rather than convergence to keep its price tied to spot. The anchoring job that an expiry date performs in a dated contract is performed continuously by the payment, so the position has no scheduled end.
Does cash and carry work when funding is negative?
Not in its standard form. Negative funding means short holders pay long holders, so a spot-long, perpetual-short position pays out instead of receiving. Strategies operating through such periods either reduce exposure, hedge across venues where rates differ, or accept negative intervals as a cost of maintaining the position.
Is this the same as the Treasury basis trade?
Structurally yes, mechanically no. Both are long the asset and short a futures contract against it. The Treasury version earns convergence on a known date and is financed through repo at high leverage; the crypto perpetual version earns variable funding payments with no end date and is collateralised at an exchange.
An Old Trade on a New Contract
The useful way to read crypto funding capture is not as a novel yield product but as the newest instance of a structure that institutional markets have used for as long as futures have existed. Buy the asset, sell the derivative, hold no view on the price, and collect what the market pays for providing that service.
What changes from market to market is the mechanism that delivers the return — storage economics in commodities, convergence and repo in Treasuries, funding payments in perpetuals — and therefore what has to be managed. The perpetual version offers an open-ended horizon and gives up a known return to get it. Whether that is a good exchange depends entirely on how the resulting variability is handled, which is an operational question rather than a conceptual one.
This article is published for informational purposes and does not constitute investment advice or an offer to transact. Hedged strategies remove directional exposure but retain financing, execution, liquidation, counterparty and venue risk. Funding rates are variable and can turn negative. Capital is at risk.
This article is for information only and is not investment advice. Past performance does not guarantee future results.
