Cointime

Download App
iOS & Android

How to Hedge in Backwardation — Backwardation Is a Bullish Indicator

Validated Individual Expert

Bitcoin entered long-term backwardation last June.

In other articles, I have outlined why backwardation is fundamentally bullish and contango is fundamentally bearish yet sucks as a timing indicator.

The difference between futures and the spot market is known as the BASIS. When futures are under spot it is in known as backwardation. When futures are over the spot market it is known as a contango.

Why does BASIS suck so badly for timing?

Well, because backwardation can occur for an instant during a downward spike which is a regular occurrence in a bull market as sell stops are hit. It can last for hours when a large player gets liquidated for over-leveraging which occurred in March 2020 with the Covid bottom. Or it can last for months in the last leg of a bear market which occurred in the Dec-Jan market of 2016–2017 and for the past six months.

Just because a market goes into backwardation does not mean it will stay there beyond an instant, a few hours, several weeks, or in the latest case six months. Further, just because a market goes into backwardation does not mean it cannot go deeper into backwardation.

With contango the reverse is true. Just because a market goes into contango does not mean it will stay there beyond an instant, a few hours, several weeks, or many months. Further, just because a market goes into a contango does mean the contango will not go into a wider contango.

The BASIS Is Simply a Reflection of Market Sentiment

Contango and backwardation simply reflect the mood of a market that is usually short-lived but it can feed upon itself and trend deeper and/or wider for months. Nevertheless, backwardation is a fundamental bullish indicator, and contango is a fundamental bearish indicator because as futures approach settlement in the spot market, the backwardation or contango will always disappear.

BASIS is a measure of sentiment. And just as contango is a Godsend for miners and a curse for speculators, backwardation is a curse for miners and a Godsend for speculators.

That said, I will argue here that both backwardation and contango are a blessing for hodlers. And it is crucial that hodlers learn this and use basis as a tool in their trading and hodling strategies.

As a hodler, I preach dollar-cost-averaging.

As a Hodler, I also preach and sing about Sayvv and Buidl, meaning that we don’t just hold, but we save by rewarding ourselves, and we build (create new wealth) to replace our Hodl.

And in previous articles, I have outlined how to hedge your HODL in markets with a contango.

Last January I warned that the fundamental weakness in Bitcoin is exchanges acting as banks, the creation shitcoins pretending printing money is real wealth creation, as well as legacy participation. What everyone else deem to be bullish I considered quite the opposite.

Further, I provided a cautionary warning for bitcoiners caught in the legacy system hype.

I did not want to be right, but the reality was at the door and now those who were anticipating BTC to go to $200,000 when it was at $60,000 are fearful $5,000 is around the corner.

This analysis was then updated in October outlining that now is the time to accumulate bitcoin using leverage wisely.

So how do we hedge our hodl during backwardation?

Hopefully, you have figured it out by now. It really is intuitive. When a market is in backwardation you can buy future purchases you plan to make between now and March, between March and June, and between June and September at or below spot. Again, backwardation is a Godsend for hodlers to lock in distressed bitcoin through Sep 2023.

Hope this helps.

Comments

All Comments

Recommended for you

  • TrumpAI tokens on Ethereum have been RUG

    PeckShield has monitored that the TrumpAI token on the Ethereum blockchain has fallen by 100%. An address starting with 0x935A sold 5,000,000,000,000,000,000,000 TrumpAI tokens, which is about 26.57 WETH (approximately $80,000). Note: rugpull tokens have the same name as legitimate tokens.

  • South Korea’s Monetary Authority: Confirmed to include token delisting standards in the Virtual Asset User Protection Act

    The Financial Supervisory Service (FSS) of South Korea has confirmed that token delisting standards will be included in the "Best Practice for Compliance with the Virtual Asset User Protection Act" released in early June. An official from the Financial Supervisory Service stated in a conversation with Bloomberg on Tuesday that the upcoming "Best Practices for Compliance with the Virtual Asset User Protection Act" will not only include listing standards for virtual assets, but also provide guidance on whether to maintain trading of listed virtual assets. The guidance will provide a basis for cryptocurrency issuers to delist in the event of problems. The guidance will be released from the end of May to early June. Currently, the Financial Supervisory Service is developing guidelines to support self-regulation by cryptocurrency exchanges under the Virtual Asset User Protection Act before it is implemented in July. The plan proposes standards for virtual asset issuance, circulation, and trading support, prohibits the listing of virtual assets with a history of hacking attacks, and requires the release of Korean white papers and technical manuals when listing overseas virtual assets.

  • HKEX CEO: Virtual asset exchanges have become HKEX’s competitors

    On May 10th, Hong Kong Exchanges and Clearing Limited's new CEO, Nicolas Aguzin, stated in an interview with the Shanghai Securities News that HKEX faces competition not only from other securities exchanges, but also from external competitors such as virtual asset exchanges. In order to meet the rapidly evolving demands of customers and technology, HKEX must balance innovation and stable business operations, continuously expand its resources for listed companies, and improve its market services.

  • WOOFi attacker address has transferred 100 ETH to Tornado cash

    PeckShield monitoring shows that the address marked by the WOOFi attacker has transferred 100 ETH to Tornado cash. The WOOFi attacker has already transferred 2200 ETH (worth about $6.5 million) to Tornado cash.

  • Trump will hold a private dinner on the day of the court recess, inviting NFT trading card buyers to attend

    On May 10th, according to sources, former US President Donald Trump will host a dinner at his Mar-a-Lago estate on a day off, inviting NFT trading card buyers to attend. This event is part of Trump's series of non-campaign activities, aimed at balancing his White House campaign and legal disputes. After Stormy Daniels testified in Trump's trial on Tuesday, Trump expressed his desire for campaigning rather than being tied up in court. Despite no public campaign activities on Wednesday, Trump's schedule includes private political meetings.

  • Tether: Deutsche Bank’s analysis lacks clarity and substantive evidence

    According to a report on stablecoins released on May 7, Deutsche Bank analyzed 334 currencies linked to stablecoins and found that 49% of stablecoins had failed during their median lifespan of about eight to ten years. The analysts concluded that most anchored assets in the cryptocurrency field will experience significant "turbulence" caused by speculative sentiment and ultimately suffer some form of decoupling event. Deutsche Bank analysts also pointed out that Tether's reserve transparency was lacking and described the company's solvency as "doubtful".

  • Yesterday, Solana’s on-chain DEX transaction volume surpassed Ethereum, reaching $1.314 billion

    On May 10th, according to DeFiLlama data, the trading volume of Solana's DEX reached 1.314 billion US dollars yesterday, surpassing the trading volume of 1.297 billion US dollars on Ethereum's DEX.

  • US court orders seizure of 279 virtual currency accounts containing criminal proceeds from North Korean hacking

    A US court has ordered the confiscation of 279 virtual currency accounts containing proceeds from North Korean hacker crimes. US District Court Judge Timothy Kelly in Washington, DC approved the federal prosecutor's request for a summary judgment on these accounts and ordered their confiscation on May 8. This ruling means that these accounts are now under the control of the US Department of Treasury.

  • South Korea’s National Tax Service announced that it would collect 40 billion won in taxes from Bithumb users

    Bithumb has issued a preliminary notice of comprehensive income tax to some users who participated in activities held between 2018 and 2021, and announced full support for the related tax amount. The position of the National Tax Service is that rewards paid to users through various activities (including virtual assets) constitute taxable income. Bithumb does not agree with the National Tax Service's opinion, but explains that taxation is mandatory.

  • Bitcoin opens $63K futures gap as thin liquidity threatens BTC price

    Bitcoin market participants are doubting the staying power of the ongoing BTC price relief bounce.