Crypto glossary
Contango and backwardation
Contango is when futures trade above the spot price and backwardation when they trade below it; the gap reveals demand for leverage and hedging.
Dated futures rarely trade exactly at the spot price. When the futures price is higher, the market is in contango; when it is lower, it is in backwardation. The difference, expressed as an annualized rate, is called the basis and shrinks to zero as the contract approaches expiry and converges with spot.
In crypto, contango is the normal state because traders are willing to pay a premium for leveraged long exposure without tying up capital. During bull markets the annualized basis on bitcoin futures can climb into double digits, which is the opportunity exploited by cash-and-carry basis trades. The same logic applies to perpetuals through positive funding rates.
Backwardation is less common and usually appears in sharp sell-offs or when hedging demand from miners and holders outweighs speculative buying. Neither state predicts future prices on its own; both describe the balance of supply and demand for leverage at that moment and can flip quickly.
Example
With bitcoin at 100,000 dollars, the three-month CME future trades at 102,000 dollars, an annualized contango of about 8 percent that a fund captures by buying spot and selling the future.