A Cash and Carry Trade is an arbitrage strategy executed in cryptocurrency markets that capitalizes on temporary price discrepancies between a spot crypto asset and its corresponding futures contract. It involves simultaneously buying the crypto asset in the spot market and selling an equivalent quantity of its futures contract. This position aims to lock in a risk-free profit derived from the basis, which is the difference between the futures price and the spot price, assuming the futures contract converges to the spot price at expiration.
Mechanism
The operational mechanics of a cash and carry trade involve precise, synchronized execution across different market venues. An entity acquires a specific crypto asset, such as Bitcoin, at its current spot price. Concurrently, it sells a futures contract for the same asset with a later expiration date, typically at a higher price (contango). The strategy profits if the futures price remains above the spot price by an amount greater than the carrying costs until expiration, or if the basis narrows as expected. At expiration, the spot and futures prices converge, allowing the trader to deliver the spot asset against the futures contract or close both positions.
Methodology
This arbitrage methodology is founded on the principle of market efficiency, seeking to exploit temporary mispricings that arise from supply/demand imbalances or latency across fragmented crypto exchanges. It is considered a relatively low-risk strategy, relying on predictable price convergence rather than directional market speculation. For institutional participants, the effective execution of cash and carry trades requires robust infrastructure for high-speed trading, access to deep liquidity across multiple platforms, and meticulous management of funding costs and counterparty risks.
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