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.
Glossar
Perpetual Futures
Structure ⎊ Perpetual Futures are a type of derivative contract, native to the cryptocurrency market, that allows traders to speculate on the future price of an underlying asset without a fixed expiration date.
Positive Funding Rate
Mechanism ⎊ A positive funding rate within perpetual futures contracts, prevalent in cryptocurrency derivatives exchanges, signifies a prevailing long bias amongst traders.
Perpetual Futures Price
Valuation ⎊ Perpetual futures price refers to the current market price of a perpetual futures contract, which differs from traditional futures contracts by having no expiration date.
Negative Funding Rate
Mechanism ⎊ Negative funding rates in cryptocurrency perpetual contracts represent periodic payments from long positions to short positions, determined by the difference between the index price and the perpetual contract price.