YoungShkreli
Education

What is backwardation?

BITFINEX:BTCUSD   Bitcoin / U.S. Dollar
Hello all,

I've been doing a lot of educational posts lately, because price has just been static. For your knowledge, I am still long on bitcoin and believe the bottom is in, but I would like to talk about something that was bullish that does not exist today: backwardation.

Backwardation is an economic phenomenon proposed by John Maynard Keynes decades ago in his publication, Treatise on Money. Backwardation is when the futures price of some asset is trading lower than the spot price. What are the implications of this? Well, let's put on our thinking caps for a moment and try to understand economics (something I implore you all to try and do).

If something is more expensive now than it will be in the future, that simply means it is more demanded NOW than later (or sudden decrease in supply or both). People are not wanting to wait for something, they want it right now. This is very notable in commodities like oil when sometimes there is a short-term shortage that will be gone later.

I live in Texas, and we have hurricanes regularly. When this happens, you will always see gas stations filled with people who are trying to fill up cans of oil so they can leave and not stop for gas because it might not be an option in the near future. This would be an example where backwardation is occurring. This is why it is a bullish phenomenon. It's telling you that for some reason, the commodity is in great demand now.

This was happening in bitcoin for quite some time, but is not happening today. Is it bearish? Not exactly, we don't have the full scope. Technically, based on the economic theory, it is neutral. The inverse of backwardation would be, you guessed it, "forwardation" or as is usually called "contango." Contango would be a bearish scenario. Perhaps I will write another article on this later in the future. But, to understand it, you simply work in reverse. Instead of a shortage, you have a surplus etc. Logic is the same.

I hope you all learned something by reading this! Understanding economics and game theory is the best skillset you can have to be a thoughtful trader or entrepreneur. Hope this resonates with some of you and you become a student of these disciplines like me. Of course, understanding a lot more is good, but if you can understand these things, you can be the best CEO . A CEO does not NEED to know programming. A great CEO DOES need to see the big picture and how to ride the economic sea strategically.

Good luck all, thanks for reading.

-YoungShkreli
Oct 05
Comment: Contango is very common in futures markets, and I would assume it is the default in many futures markets for the following reason: you don't have to pay for storage of the commodity and you can instead get "riskless" interest with the money you have saved from the storage.

However, with Bitcoin, you don't really have to pay a premium for someones else to store the bitcoin for you so it doesn't really matter. Also, all of this is irrelevant to bitcoin because I don't know of a futures market for BTC that isn't cash settled. There is no physical delivery. (not because BTC is intangible, but because contracts do not end with someone sending you BTC, then end in an exchange of fiat.)
Oct 05
Comment: they end*
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Bitmex is a derivatives market with with futures and perp-swaps. It is the biggest derivative market in Bitcoin.Sometimes with up to 5B in daily volume. The underlying collateral is bitcoin, and contracts are settled in Bitcoin. Bitcoin went into backwardation because of Chinese devaluation. There were plenty Chinese exchanges settling in BTC. Capital flight creates present demand for BTC.
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Msparky tubehand
@tubehand, The Chinese and Korean Demand for BTC for the purpose of storage of capital and moving it around the globe is what is keeping the price above $6k
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@tubehand, I'm not sure why I didn't say Bitmex. That was the source I was going by lmao. Sometimes, I have a poor cognition moment. Anyways, interesting comments. Good to see intelligent though. :)
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YoungShkreli YoungShkreli
@YoungShkreli, thought
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Great Post
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YoungShkreli RichardTom
@RichardTom, Thank you!
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Great post!
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@cm444, Thank you, glad you enjoyed it!
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Excellent piece. Thank you for expressing this so clearly.
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