Backwardation

In our hypothetical example, Eva sees spot bitcoin at 60,000 USD and futures expiring in 90 days at 58,800 USD. The contract is cheaper by 1,200 USD. Subtracting spot from futures gives a difference of minus 2% of spot. The sign reverses under the opposite definition of basis, meaning this price difference. Here, backwardation describes today’s contract discount; it does not say that bitcoin itself will trade at that price later. The figures are hypothetical, not current quotes. [1] [2]

Eva adds another maturity: the 30-day contract costs 59,400 USD and the 90-day contract 58,800 USD. The later one is cheaper, so prices arranged by expiry form a downward curve. But a pair priced at 59,000 USD and 59,500 USD would both be below spot at 60,000 USD while rising toward the later maturity. A spot discount and the slope of the curve are therefore different things. Before drawing a conclusion from market commentary, Eva checks which maturities the writer is comparing. [2]

Eva needs prices from the same moment, in the same currency and with comparable settlement terms. An old quote or a different payoff calculation can create a misleading gap. Standard CME Bitcoin futures settle in cash against the CME CF Bitcoin Reference Rate, or BRR. That is not a promise to buy Eva’s bitcoin at a price on any exchange she chooses. Cash settlement does not deliver BTC either. The contract rules matter just as much as the prices she sees side by side. [4]

For physical commodities, readily available inventory has practical value: it can keep a factory running. This benefit is called convenience yield. A bitcoin discount does not itself establish such a warehouse benefit, and it is not a protocol reward for holding BTC. Bitcoin price relationships can reflect financing, demand for protection against price changes and obstacles to trading across markets. Eva cannot simply take an explanation from the metals market and automatically apply it to Bitcoin. [1] [3]

Eva imagines reverse cash-and-carry, the reversed combination of a spot and futures trade. She borrows 1 BTC, sells it for 60,000 USD and buys corresponding futures at 58,800 USD. If both final prices are 55,000 USD, buying back the borrowed bitcoin makes 5,000 USD while futures lose 3,800 USD. That leaves a gross 1,200 USD before borrowing and trading costs. Cash-settled futures do not deliver BTC to repay the loan; she must buy it separately. This is our linear dollar model, not the size of a standard CME contract. [3] [4]

Imagine an interim spot price of 70,000 USD and futures at 69,000 USD. The sale position in borrowed bitcoin, or short, loses 10,000 USD; futures gain 10,200 USD. But profit in another account may not be available in time to top up loan collateral, the assets pledged to secure repayment. Depending on the agreement, the lender may also change terms or demand the coins back, known as loan recall. Eva may then have to close the trade early. Offsetting price movements do not ensure she has usable cash when she needs it. [3]

If Eva buys only futures at 58,800 USD with exposure corresponding to 1 BTC, there is no opposing spot position. A final price of 55,000 USD then means a loss of 3,800 USD, whereas 63,000 USD produces a gain of 4,200 USD, before costs. Initial backwardation guarantees neither rising futures nor falling spot. Both prices can move and meet along different paths. A lower entry price may be preferable to a higher one, but it does not protect against a further fall. [1]

To continue beyond expiry, Eva closes the old contract and opens a new one; this is rolling. Selling the old contract at 59,000 USD and buying the new one at 58,000 USD creates a 1,000 USD price gap rather than automatic instant profit. The old position’s result depends on its entry price. New linear futures on 1 BTC lose 2,000 USD if the price subsequently reaches 56,000 USD, or gain 1,000 USD at 59,000 USD. Cheaper rolling can help, other things equal, but subsequent market movement and costs also determine the total return. [1] [2]