Ugly Old Goat
Sep 3, 2018 · 3 min read

Backwardation is not a technical or psychological situation . . . it is a fundamental situation. . . and that is why it is so important. I covered the phenomena here.

It is fundamental because when it occurs commercial users will defer purchasing bitcoin whenever possible in favor of the futures which is short term bearish. But the deferred purchases must be consummated eventually. . . so in the long run it is very bullish.

In backwardation there is a fundamental shift from very weak speculative hands, who really do not understand how markets operate, to strong commercial hands who actually use and need bitcoin daily.

When a market goes into backwardation commercial users will only purchase the bare minimum bitcoin they need for current operations. If the purchase can be delayed they will purchase futures rather than spot, locking in the difference as pure profit with little risk (except exchange risk). (In the United States it is the commercial interests who created and own the exchanges through self regulated membership.)

While backwardation is short term bearish . . . it is very bullish long term. . . and that is why backwardation is a lousy timing indicator.

The opposite it true when we go into extreme contango.. . short term bullish . . . long term bearish . . . and again a lousy timing indicator.

Nevertheless backwardation and extreme contango are very useful long term indicators and due to the backwardation I have maintained bitcoin was unlikely to break 5,000 every tune it got close to or broke below 6,000. (If it happened the backwardation would likely have gone to 400–500, which would be even more extreme and the healthiest situation for a return of a bull market to new all time highs.)

Interestingly, prolonged backwardation occurred in bitcoin alone, and not Eth, bCrash, and other alts. . . these alts continued to new lows while bitcoin did not . . . leading me to describe the phenomena as the Grand Exthit (pronounced with a lips and a weak wrist.) . . . a situation long predicted . . . but slow to be realized.

The Grand Exthit now appears to be the driving force in the Bitcoin market representing a long anticipated fundamental shift toward Bitcoin dominance.

As a trader you must understand the futures markets exist for one purpose and one purpose alone. It is a vehicle for commercial users to pass on risk.

Speculators assume this risk, so they also provide a very much needed service in the market place. They provide liquidity for commercial users. The futures market is not a casino. It is not gambling. Gambling is a created risk that does not naturally occur in the marketplace.

Futures markets have always been created by commercial interests for the purpose of passing off risk to speculators who provide much needed liquidity. Most speculators have no clue why futures markets exist and simply regard futures trading as a casino. They are not. Bitcoin futures traders provide a very useful economic function, gamblers do not.

My readers should know why futures markets exist and why backwardation and extreme contango are fundamental situations that indicates bottoms and tops are near when they occur.

As the bitcoin market matures backwardation and extreme contango will become very rare, but for now it makes successful trading much easier for those who understand market fundamentals.

UOG

    Ugly Old Bitcoin Standard Bearer

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