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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.

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