Bitcoin has fallen into backwardation, a structure that occurs when futures contracts trade below the spot price and is typically associated with stress, “extreme fear,” or heavy hedging activity. This change comes as bitcoin has fallen 30% from its all-time high.
According to an article
As Young notes, “backsliding doesn’t happen often, and when it does, it usually marks stress, forced risk reduction, or a point of short-term capitulation.”
Young adds that markets typically follow one of two paths: “a reversal, as the panic dissipates” or “continuing into a final surge, which also tends to mark the bottom of the move.”
Backwardation has a habit of aligning with local or major market lows. It marked the exact low point of the cycle in November 2022, around $15,000 during the FTX collapse. Backwardation reappeared in March 2023 when bitcoin briefly fell below $20,000 during the decline of SVB and USDC before rebounding strongly.
Another example occurred in August 2023, when the Grayscale ETF news sold off, pushing prices towards $25,000, which marked a short-term bottom and a quick reversal.
The three-month annualized rolling basis of futures contracts, which has now fallen to around 4%, its lowest level since November 2022. The basis measures the annualized return available from a basis transaction where traders buy bitcoin in spot and simultaneously sell a futures contract that expires in three months. Futures contracts typically trade at a premium, while the spread offers a relatively low risk return.
The sharp compression of this premium shows that demand for long leveraged exposure has fallen massively. In bullish phases, traders are willing to pay for futures exposure, driving up the basis, which reached 27% in March 2024, during bitcoin’s all-time high of $73,000.
The current decline reflects a more cautious environment, a lower appetite for risk and a market still digesting the recent decline. During moments of extreme enthusiasm, the curve can swing into a steep contango, but under normal conditions, bitcoin trades in a relatively smooth contango structure.
