Bitcoin (BTC) Futures: A Shift to Scarcity

January 23, 2019 / by Bill Noble

Given the importance of Bitcoin futures, we decided to plot the prices of the various futures contracts out until June. The data for the CME contract is shown in Figure 1. Data is as of Jan. 23.

Looking at the graph of the CME contract, the line has a downward slope (Figure 1). In futures jargon, this is called “backwardation.” With backwardation, the market is willing to pay more to get a product sooner versus buying it at a lower price for a delivery date in the future. We noticed the same pattern in CBOE Bitcoin (BTC) contract as well (Figure 2).

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So right now, people are willing to pay more to get Bitcoin (BTC) futures sooner rather than later.  When people are willing to pay more now than pay less later, it is considered a sign of a shortage or scarcity in the market (Source: Generally speaking, this can be seen as a bullish sign.

This is an incredibly interesting development. Reason: we have received information sourced from Bloomberg, showing that the current backwardation/scarcity condition in Bitcoin (BTC) shortage marks a noticeable shift from the futures curve last year.

Last year, the Bitcoin (BTC) futures curve was frequently upward sloping. That condition is called Contango. Contango occurs when the futures price is above the expected future spot price.

Contango results when people are willing to pay more for the commodity at some point in the future rather than incur the cost of storing it or hedging it. Said plainly, nobody was in a big hurry to buy Bitcoin (BTC), which makes sense given the bear market.

Bottom Line: This bit of intelligence on the Bitcoin (BTC) futures market may be a hidden gem. It lends credence to our theory that a base may be building for a potential up move. Risk reward seems to favor a cautiously bullish view.  The fact that the market either can’t see this or is ignoring it may enhance the constructive slant on Bitcoin (BTC).

This is something new on the radar for the Crypto.IQ Trading Desk. They have made some adjustments to potentially take advantage of this and other data.

Join me there as we plot the course for the next move.