What is backwardation in crypto markets?
Backwardation means a crypto futures contract trades below spot. The gap is called the basis, and it can appear in Bitcoin and Ether futures.
Vahe HakobyanEditor-in-chief
Updated Oct 6, 20263 min readFact-checked
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Traders watch the futures curve to see whether buyers who want the asset now or traders who want it later have the upper hand. The same relationship shows up in dated contracts and in perpetual swaps, which never expire.
What is crypto backwardation?
A crypto futures contract sets a price for a trade on a later date. Backwardation happens when that contract trades below the spot price. The gap between the two is the basis, and in backwardation the basis is negative.
Why does backwardation happen in crypto?
Backwardation often reflects strong spot demand or bearish futures sentiment. It can happen in Bitcoin and Ether futures, and in perpetual swaps the same state shows up as negative funding.
- Spot buyers pay up to get the asset today.
- Futures traders agree to a lower price for later delivery.
- Perpetual swaps show negative funding, when shorts pay longs.
- A strained spot market can push the basis below zero.
How does backwardation end?
A dated futures contract settles on an expiry date, and settlement is tied to spot. As that date approaches, the two prices usually converge, so backwardation can reverse.
Convergence does not say which direction the market moves. The futures price can move up toward spot, spot can move down toward futures, or they can meet in the middle. A perpetual swap has no expiry.
How is it different from contango?
Contango is the opposite of backwardation, with futures trading above spot and a positive basis. It is the more common state in many futures markets, because holding an asset forward has a cost. Markets can flip between the two.
Frequently asked questions
No. It describes a relationship between two prices, and it can appear in calm and stressed markets alike. Prices have moved both ways while futures sat below spot.
Funding is a periodic payment between long and short positions. Negative funding means shorts pay longs, which is the swap market's version of a discount to spot.
It can last while the condition behind it lasts, and a perpetual swap has no expiry to pull it back to spot. Dated futures usually converge near expiry.
Compare the futures price with the spot price for the same coin and the same delivery date. A lower futures price means backwardation.
