Futures Basis
In crypto the derivatives market accounts for the most volume so it's important to be aware of the dynamics of that market.
There are two types of contracts that are very popular: the perpetual swap contracts and the classic futures contracts with an expiration date.
The main difference between the two is that perpetuals are continuous contracts on which, in theory, you can keep your position open for as long as you want as the name would suggest.
On the other hand futures contracts settle after a specific time period. In crypto the quarterly contracts are the most popular and they last 3 months of course (one quarter of the year).
Quick tip: the exchanges Huobi and Okex have the most actively traded quarterly futures contracts, although Binance has gained a lot of market share too in recent times.
These futures contracts, normally speaking, trade higher than the spot market (or the perpetuals which closely follow the current spot price).
The further away the expiration the higher the prices are (for example December contracts trade higher than September contracts).
Eventually decay happens when the expiration date starts nearing and in the end the futures contract completely converges and starts trading at the same price as the spot market.
Quick tip: the vast majority of futures contracts in crypto are coin margined, although there are also a few dollar margin contracts (which use tether).
The futures basis looks at that premium at which futures are trading compared to spot.
The calculation is simple: (fut - spot) / spot
This information can give you valuable insight in what's happening in the market.
Most of the time these futures contracts from different exchanges trade at similar prices, although small differences always happen, and they move in line with spot albeit at a premium.
However sometimes the futures (or futs in short) diverge a little bit more radically and they rise or decline more relatively to the spot market, or they even start moving in the opposite direction. Thus divergences can happen, both bullish and bearish.
Comparing the lows and highs of the spot price and the futures prices can give you insight in how aggressive derivatives market participants are in either direction.
When the futures are trading higher than the spot market, which could be considered the default setting, they are trading in what we call "contango".
Nevertheless sometimes they do trade below the spot price and we call this "backwardation".
When looking at historic crypto data we can easily conclude that backwardation only ever happens after a violent sudden crash or a deep sustained downwards bleed.
Quick tip: these moments of backwardation have proven to be great buying opportunities more often than not.
So paying attention to the futures basis can pay off, literally!
There are two types of contracts that are very popular: the perpetual swap contracts and the classic futures contracts with an expiration date.
The main difference between the two is that perpetuals are continuous contracts on which, in theory, you can keep your position open for as long as you want as the name would suggest.
On the other hand futures contracts settle after a specific time period. In crypto the quarterly contracts are the most popular and they last 3 months of course (one quarter of the year).
Quick tip: the exchanges Huobi and Okex have the most actively traded quarterly futures contracts, although Binance has gained a lot of market share too in recent times.
These futures contracts, normally speaking, trade higher than the spot market (or the perpetuals which closely follow the current spot price).
The further away the expiration the higher the prices are (for example December contracts trade higher than September contracts).
Eventually decay happens when the expiration date starts nearing and in the end the futures contract completely converges and starts trading at the same price as the spot market.
Quick tip: the vast majority of futures contracts in crypto are coin margined, although there are also a few dollar margin contracts (which use tether).
The futures basis looks at that premium at which futures are trading compared to spot.
The calculation is simple: (fut - spot) / spot
This information can give you valuable insight in what's happening in the market.
Most of the time these futures contracts from different exchanges trade at similar prices, although small differences always happen, and they move in line with spot albeit at a premium.
However sometimes the futures (or futs in short) diverge a little bit more radically and they rise or decline more relatively to the spot market, or they even start moving in the opposite direction. Thus divergences can happen, both bullish and bearish.
Comparing the lows and highs of the spot price and the futures prices can give you insight in how aggressive derivatives market participants are in either direction.
When the futures are trading higher than the spot market, which could be considered the default setting, they are trading in what we call "contango".
Nevertheless sometimes they do trade below the spot price and we call this "backwardation".
When looking at historic crypto data we can easily conclude that backwardation only ever happens after a violent sudden crash or a deep sustained downwards bleed.
Quick tip: these moments of backwardation have proven to be great buying opportunities more often than not.
So paying attention to the futures basis can pay off, literally!
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