Perpetual Swap Basis
The perpetual swap basis is the spread between the price of a perpetual swap contract and the spot price of the underlying asset. Because perpetual swaps do not have an expiration date, they rely on the funding rate mechanism to keep this basis near zero.
A positive basis indicates that the perpetual contract is trading at a premium to the spot, while a negative basis indicates a discount. Traders monitor the basis to gauge market leverage and sentiment; a widening basis often signals increased bullishness or bearishness.
The basis is also a key input for basis trading, where a trader goes long on the spot asset and shorts the perpetual swap to capture the funding rate yield. This strategy is popular because it is delta-neutral, meaning it is not exposed to the price direction of the underlying asset.
However, it does carry liquidation risk if the margin requirements are not maintained. The basis reflects the cost of leverage in the market.