Bitcoin Enters Rare Backwardation, Signaling Market Stress and Potential Bottoms
Bitcoin has entered a state of backwardation, where futures are trading below the spot price, a condition that indicates market stress and extreme fear among investors.
The three-month annualized futures basis has dropped to around 4%, its lowest level since November 2022. Historically, occurrences of backwardation have coincided with significant or local market bottoms.
Examples include November 2022, when bitcoin was around $15,000 during the FTX collapse; March 2023, when BTC briefly fell below $20,000 amid the SVB and USDC depeg events, followed by a strong rebound; and August 2023 near $25,000 after Grayscale ETF news, which marked a short-term bottom and rapid market reversal.
This setup is unusual in bitcoin markets and often signals an opportunity to take the other side of the trade. Backwardation may either herald a reversal or cause a final flush that marks a bottom.
Bitcoin has experienced a decline of approximately 30% from its all-time high, contributing to the current market tension.
The compression of the three-month basis suggests reduced demand for leveraged long exposure and a softer risk appetite among traders. Notably, the basis reached 27% during the peak when bitcoin hit $73,000 in March 2024.
During bullish phases, the futures curve can shift into contango, but under typical conditions, bitcoin futures trade in a relatively mild contango pattern.
