Bitcoin CME Futures Slip Into ‘Backwardation’ as Bearish Sentiment Grips Market

Backwardation refers to a market condition where futures prices trade lower than the spot price.

Dec 14, 2021 at 7:03 a.m. UTC
Updated Dec 14, 2021 at 3:36 p.m. UTC

Omkar Godbole is the senior reporter on CoinDesk's Markets team.

Bitcoin futures listed on the Chicago Mercantile Exchange (CME) have slipped into “backwardation,” a market condition that represents declining institutional appetite for the cryptocurrency.

  • Data tracked by Skew shows that backwardation – when future contract prices are lower than short-term prices – emerged on Monday with the one-month contract slipping to an annualized discount of nearly 14%, the steepest since at least mid-2020.
  • The three-month bitcoin futures slipped to a discount of 3%, as the cryptocurrency fell more than 6% to $45,700.
  • Institutional investors prefer to use regulated CME futures contracts to gain exposure to bitcoin. ProShares’ bitcoin exchange-traded fund (ETF) and Valkyrie Investments’ ETF launched in October also invest in CME-listed futures.
  • So, a discount in CME futures could represent weak demand from institutions and sophisticated investors, as investment banking giant JPMorgan noted in May. Back then, the futures slipped into discount, with bitcoin’s price crashing from $58,000 to $30,000.
  • The backwardation is perhaps the sign of bearish sentiment stemming from renewed coronavirus concerns and the U.S. Federal Reserve’s impending monetary policy tightening. Further, market participants could be reducing exposure ahead of year end.
  • Physically delivered contracts like oil or pork belly futures see backwardation when there is an incentive to own physical material at the earliest – say, to keep the production process going. That pushes the spot price higher than the futures price.
  • The CME bitcoin futures are cash-settled – there is no actual transfer of coins on the settlement date. Besides, bitcoin is still primarily seen as a speculative asset rather than a physical commodity like oil or pork bellies.

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Omkar Godbole is the senior reporter on CoinDesk's Markets team.

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Omkar Godbole is the senior reporter on CoinDesk's Markets team.

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