What Is the Difference between Contango and Backwardation in Perpetual Futures?

Contango occurs when the perpetual futures price is trading higher than the underlying spot price, resulting in a positive funding rate where long position holders pay short position holders. This situation typically signals bullish market sentiment.

Backwardation is the opposite scenario: the perpetual futures price is lower than the spot price, leading to a negative funding rate where shorts pay longs. This often indicates bearish sentiment, as traders are willing to pay a premium to bet on a price decline.