What is Contango?
Contango is a market structure where futures or forward prices are higher than the current spot price. In a contango market, prices increase for later delivery dates, creating an upward-sloping forward curve. This is the normal condition for many commodity and financial markets, including crypto during bullish periods.
Why Contango Occurs
Several factors drive contango. Cost of carry includes financing costs, storage, and insurance needed to hold an asset until future delivery. Risk premium reflects sellers wanting compensation for uncertainty. Bullish expectations mean buyers are willing to pay more for future delivery expecting higher prices.
In crypto, contango primarily reflects cost of leverage and bullish market sentiment.
Contango in Crypto Markets
Crypto futures and perpetuals frequently trade in contango during bull markets. The premium reflects the demand for leveraged long exposure exceeding supply. Contango premiums in crypto can be extreme by traditional market standards. During strong bull runs, annualized basis can exceed 50%.
Trading Contango
Contango creates opportunities for basis trading. The cash-and-carry strategy buying spot and shorting futures profits from contango by capturing the premium as prices converge. Funding arbitrage captures positive funding rates that arise from perpetual contango.
Contango and Roll Yield
For longer-term futures holders, contango creates negative roll yield. As contracts approach expiration and are rolled to later-dated contracts, traders pay the contango premium repeatedly.
Measuring Contango
Contango is measured as the percentage premium of futures over spot. A 2% monthly contango represents a 24% annualized premium.