Bitcoin has fallen into backwardation, a structure that occurs when futures trade below the spot price and is typically associated with stress, “extreme fear,” or intense hedging activity. The change comes as Bitcoin has fallen as much as 30% from its all-time high.
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As Young points out, “pullback does not occur frequently, and when it does, it usually indicates stress, forced risk reduction, or a point of short-term capitulation.”
Young adds that markets typically follow one of two paths from this point: “Reversal, as the panic dissipates,” or “continuation toward a final wave, which also tends to mark the end of the move.”
Backwardation has a history of aligning with local or major market lows. It marked the exact cycle low in November 2022, around $15,000 during the FTX crash. The pullback reappeared in March 2023, when bitcoin briefly fell below $20,000 during the SVB and USDC rally before recovering strongly.
Another example occurred in August 2023, when news about the Grayscale ETF sold off, driving prices to $25,000, marking a short-term bottom and quick reversal.
The annualized rolling basis of three-month futures, which has now fallen to around 4%, its lowest level since November 2022. The basis measures the annualized return available from a basis trade in which traders buy bitcoin spot and sell a futures contract simultaneously that expires in three months. Futures typically trade at a premium, while the spread offers a relatively low risk return.
The sharp compression of that premium shows that demand for leveraged long exposure has fallen enormously. In bull phases, traders are willing to pay for future exposure, which drives up the basis, which reached 27% in March 2024, during bitcoin’s all-time high of $73,000.
The current decline points to a more cautious environment, lower risk appetite and a market still digesting the recent decline. During times of extreme enthusiasm, the curve can become a steep contango, but under normal conditions, bitcoin operates in a relatively smooth contango structure.
