What Role Does Institutional Hedging Play in Creating Backwardation?

Institutional hedging can contribute to backwardation in cryptocurrency markets. Large institutional players who hold significant amounts of a cryptocurrency may sell futures contracts to hedge against a potential price decline.

This large-scale selling of futures can drive down their price relative to the spot price, creating or exacerbating backwardation. This is particularly true during times of market stress or uncertainty when institutions are more likely to seek downside protection.

The increased demand for short positions from hedgers can overwhelm speculative long interest, leading to a backwardated market structure.