Differentiate between a ‘Strong Basis’ and a ‘Weak Basis’.
A strong basis occurs when the spot price is high relative to the futures price, meaning the basis (Spot – Futures) is a large positive number or a small negative number. This typically indicates strong current demand for the physical asset.
A weak basis occurs when the spot price is low relative to the futures price, resulting in a small positive number or a large negative number. This often signals weak current demand or a high cost of carry.
Glossar
Basis
Foundation ⎊ The basis, within cryptocurrency derivatives, represents the differential between the spot price of an underlying asset and the price of its corresponding futures contract.
Weak Basis
Contango ⎊ This market structure exists when the futures price trades at a discount to the spot price, reflecting the cost of carrying the underlying asset until the futures contract expires.
Strong Basis
Arbitrage ⎊ A strong basis, where the futures price significantly exceeds the spot price plus carrying costs, signals a substantial arbitrage opportunity for sophisticated market participants.