Bitcoin Futures ‘Backwardation’ Could Signal Bearish Mood

This condition in the bitcoin futures market hasn't happened since May 2019, according to Luno.

AccessTimeIconOct 19, 2022 at 3:15 p.m. UTC
Updated Oct 21, 2022 at 12:06 p.m. UTC

Bitcoin futures listed on the Chicago Mercantile Exchange slipped into prolonged backwardation during September, theoretically a bearish signal, according to a weekly report from crypto platform Luno.

Backwardation is an unusual condition in futures markets when contracts for maturity or delivery many months in the future are trading at lower prices than the near-term, or "front-month," contract. It sometimes can signal that traders see prices falling in the medium or long term.

This hasn't happened in the bitcoin futures market for a sustained stretch of time since May 2019, according to Luno. What is rare is the “prolonged” episode of backwardation, as described by Luno. The condition has appeared for short periods of time, including in May 2021 for a few days.

“A steeper futures curve (i.e., a high next-month premium over front-month expiry) indicates bullish sentiment,” the report stated. “A flat futures curve or a downward trending curve implies the opposite – longs require compensation for the risk of exposure in further dated and less liquid BTC contracts.” The report was produced for Luno by the Norwegian crypto-market analysis firm Arcane Research. (Luno is owned by Digital Currency Group, of which CoinDesk is an independent subsidiary.)

Laurent Kssis, a crypto trading adviser at CEC Capital, said the constant selling isn’t helping change this pattern in the near future. “As impetus for a rally and any further good news in crypto unlikely before next year, the best strategy is calendar spreads i.e. selling puts and buying calls,” he said.


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Lyllah Ledesma

Lyllah Ledesma is a CoinDesk Markets reporter currently based in Europe. She holds bitcoin, ether and small amounts of other crypto assets.