Contango/Backwardation Basis
Last updated
Last updated
Basis is a common measure used in futures trading to quantify the difference between futures price and spot price. IntoTheBlock calculates the basis as futures price minus spot price.
This indicator also introduces the traditional concepts of contango and backwardation. When a futures contract is in contango, its price is above the spot price. On the other hand, a futures contract is said to be in backwardation when its price is below spot price.
The Contango/Backwardation Basis metric is effective to gauge futures’ investors positioning and sentiment. Futures contracts are most of the time in contango (priced at a premium relative to spot markets). However, the amount of that premium often deviates as price and sentiment changes.
For example, we can see that on September 3 - when Bitcoin crashed 10% - futures contracts briefly went into backwardation (discount relative to spot). This indicates overly bearish sentiment at a point which marked a local bottom for Bitcoin. The same pattern emerged during the March 12 crash. On the other hand, a very high basis can often signal an over-extended market. Therefore when the basis of futures contracts go too far into contango or backwardation, the market may be over-positioned in either direction, making this a potential indicator to spot trend reversals.
