How To Earn Funding While Being Long Bitcoin . . . and Dancing the Contango
--
I have done many shorties on The Basis, Backwardation, and Contango.
I have especially emphasized that backwardation is a bullish fundamental indicator, since this is what we have seen in bitcoin every time we approach 6,000. While it is a lousy timing indicator it will keep you from becoming overly pessimistic in a bear market and fundamentally indicates the end of a bear market is near.
This is why I never thought bitcoin would test 5,000. . . and so far it has not. (In contrast ethereum has remained at full carry or nearly full carry throughout its decline only briefly sinking into backwardation that results in a rally and a quick return to full carry and then sinks again into one new low after another.)
Further, I do not consider backwardation a technical indicator, but a fundamental indicator because when it happens commercial buyers will defer purchases in the spot market in favor of the discounted futures.
The same phenomena occurs in reverse when the market goes into a huge contango.
Once again, it is a lousy timing indicator but it will prevent you from becoming overly optimistic in a raging bull market and fundamentally indicates the end of a bull market is near as commercial sellers who must sell will defer selling on the spot market in favor of selling on the futures market at a substantial premium, locking in the difference. An exaggerated contango was manifest in Nov/Dec 2017 suggesting the end of the bull was near, just as backwardation occurred every time we approached 6,000 suggesting further downside was unlikely.
For commercial interests trading the basis has little to do with price and everything to do with premiums and discounts.
This phenomena of backwardation and extreme contango is especially apparent in bitcoin because it is still an immature market. There are many novice speculators that really do not understand the commercial aspects of a market . . . and bitcoin has been primarily a speculative market. . . and this creates a tremendous advantage to the wise trader who understands such disparities can fundamentally only be temporary.
