The basis trade—a strategy that's become increasingly popular among traders—has now ballooned to approximately $1.5 trillion in notional value. Morgan Stanley's research team is flagging this explosive growth as a serious concern, particularly given what we witnessed back in 2020 when similar market dislocations triggered significant volatility and cascading liquidations.

What's the worry here? When a market segment grows this large, systemic risks start piling up. Any sharp dislocation in funding rates or sudden shifts in market structure could potentially unwind these positions in chaotic fashion, creating the kind of contagion we'd rather not repeat.

The strategists emphasize that keeping a close eye on the basis trade's trajectory isn't just academic—it's essential for maintaining market stability. As the crypto market matures and these arbitrage-driven strategies proliferate across exchanges, regulators and traders alike need to understand the plumbing better. One wrong move, and we could be looking at another rough ride through the volatility cycle.