How Does the Concept of “Contango” or “Backwardation” Apply to Perpetual Futures?

Contango and backwardation describe the relationship between the futures price and the spot price. While perpetual futures lack an expiration, their price can trade at a premium (analogous to contango) or a discount (analogous to backwardation) to the spot price.

The funding rate is the mechanism that dynamically pushes the perpetual price back toward the spot price, effectively managing this premium or discount.