Bitcoin Futures Backwardation: Reflection of “Weak Demand” or A Sign of “A Giga Bottom”

The price of Bitcoin has been bouncing this week, going from $31,000 on Tuesday to above $38,400 on Thursday. As of writing, BTC/USD is trading around $37,400.

However, despite the jump, the price continues to be in the $30k-$40k range, and until either of the ends are breached, it is hard to pinpoint the direction the cryptocurrency will move in.

Amidst this, the JPMorgan Chase team is pointing to backwardation in a part of the futures market as the reason for caution.

Ever since the deep rout in cryptocurrency prices towards the end of May, the spot prices have been keeping above the futures prices.

Hedge funds are cutting shorts on CME #bitcoin futures as cash and carry opportunities recede pic.twitter.com/2LXe6GV29l

— skew (@skewdotcom) June 9, 2021

As we reported, futures premium has now almost completely gone with the spot price and the 3-month futures contract trading almost at the same price, indicating a more bearish sentiment among futures traders.

“We believe that the return to backwardation in recent weeks has been a negative signal pointing to a bear market,” JPMorgan strategists led by Nikolaos Panigirtzoglou wrote in a note.

Based on the 21-day rolling average of the 2nd Bitcoin futures spread over spot prices, JPMorgan also pointed out that the Bitcoin futures curve was in backwardation for most of 2018, the bear market.

Backwardation is an “unusual development and a reflection of how weak Bitcoin demand is at the moment from institutional investors” who tend to trade on CME, according to the report.

However, trader CL of eGirl Capital argues, “pretty sure if you longed bitcoin every time bitcoin was in backwardation and taken profits after bounce, you would've retired.”

if i highlighted everytime it got near 0% or backward last 2.5 years pic.twitter.com/JzM7kSBGuW

— CL (@CL207) June 10, 2021

According to the trader, the “longer dated the backward futures are, the more bullish it is” because “it means that people are literally not even short term bearish, they're long term bearish…. on the best performing asset of the decade, which is usually…. a giga bottom.”

Another concerning trend meanwhile for JPMorgan analysts is Bitcoin's relatively depressed share of total crypto market value. Bitcoin dominance, however, has been going down ever since the 2017 market when tons of new crypto entered the market during the ICO mania.

Currently, Bitcoin’s dominance is at about 42%, down from 70% at the start of the year. For JPMorgan strategists’, Bitcoin’s share needs to top 50% to support the argument that the bear market is over.