What is Backwardation?
Backwardation is a market structure where futures or forward prices are lower than the current spot price. In a backwardated market, prices decrease for later delivery dates, creating a downward-sloping forward curve. This condition is opposite to contango and typically reflects immediate demand exceeding future expectations.
Causes of Backwardation
Backwardation occurs for several reasons. Immediate scarcity means current supply cannot meet demand, driving spot above futures. Bearish expectations mean traders expect lower future prices. Income from holding the spot asset, such as staking yields, can also contribute.
In crypto, backwardation often appears during market stress, selloffs, or when sentiment turns bearish.
Backwardation in Crypto
Crypto markets shift to backwardation during selloffs and bear markets. When sentiment turns negative, perpetuals can trade below spot, creating negative funding rates where shorts pay longs.
Trading Backwardation
Backwardation creates different opportunities than contango. Reverse cash-and-carry involves shorting spot and going long futures to capture the discount as prices converge. Long perpetual strategies collect negative funding when shorts pay longs.
Positive Roll Yield
For long futures holders, backwardation creates positive roll yield. As contracts approach expiration, they converge upward to spot price. Rolling to later contracts at lower prices means buying cheaper each roll.
Duration of Backwardation
In crypto, backwardation tends to be shorter-lived than contango. Bull markets with sustained contango are more common than bear markets with sustained backwardation. However, during acute stress events, backwardation can be extreme though brief.