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Bitcoin Futures ‘Backwardation’ Could Signal Bearish Mood

Facebook iconLinkedin iconTwitter iconBitcoin futures on CME slipped into prolonged backwardation for the first time since May 2019, according to Luno. (Laevitas, via Luno)

Bitcoin futures on CME slipped into prolonged backwardation for the first time since May 2019, according to Luno. (Laevitas, via Luno)

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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 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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