Spot, futures and the gap between them
A dated futures contract is an agreement to trade at a set price on a future date. Its price is not the same as today’s spot price. The difference between the two is the futures basis.
basis = futures price − spot price
When the basis is positive, the futures contract is trading above spot. When it is negative, it is below.
Contango and backwardation
Two terms describe the usual patterns.
- Contango. Futures prices are above spot, and longer-dated contracts are priced higher than shorter-dated ones. This is the typical condition in many markets.
- Backwardation. Futures prices are below spot, with longer-dated contracts priced lower. This is less common and often appears in stressed or very bearish periods.
Plotting prices for each expiry gives a “futures curve” or term structure. An upward-sloping curve is contango, a downward-sloping one is backwardation.
Why futures usually sit above spot
The standard explanation is the cost of carry. Imagine you want exposure to a coin at a date three months from now. You could buy the coin today and hold it, or you could buy a futures contract and keep your cash in the meantime. Holding the coin ties up money that could otherwise earn interest. For a fair futures price, the contract has to compensate for that, so it trades a little above spot.
This links to a pricing logic called cash-and-carry. If the future is priced too far above spot, a trader can buy spot, sell the future, and hold until expiry. At expiry the two prices converge, so the trader keeps the gap, in theory without taking a view on price direction. The activity of such traders pushes futures down and spot up until the gap narrows to something near the cost of funding. Interest rates therefore influence the typical level of the basis.
In crypto, the premium is often larger than interest rates alone would imply. That is generally attributed to strong demand for leveraged long exposure, which pushes futures higher than arbitrage can immediately pull back, given costs and limits on capital.
A worked example
These are illustrative numbers, not market data. Spot is $50,000 and a three-month future trades at $50,750.
- Basis in dollars: $50,750 − $50,000 = $750.
- Basis as a percentage of spot: 750 / 50,000 = 1.5%.
- Over three months, which is a quarter of a year, a simple annualisation multiplies by four: 1.5% × 4 = 6% per year.
The annualised figure makes contracts with different expiries comparable. The calculation is simple, not compounded, and it ignores fees and margin costs. A trader who bought spot and sold this future would, at expiry, capture roughly the $750 gap if everything went to plan, but would also have capital tied up and exchange risk.
At expiry the futures price converges to spot, so the basis shrinks toward zero as time passes. If spot stays flat, a long futures holder sees the premium erode as the contract ages. This is why rolling a long position from one expiry to the next can have a cost in contango, and a gain in backwardation.
Basis and perpetual contracts
Perpetuals have no expiry, so they have no basis in the same sense. Their equivalent link to spot is the funding rate. The idea is similar, though: a premium on the perpetual shows demand for long exposure, and funding is how that premium is paid for over time. Comparing a dated future’s annualised basis with perpetual funding is a common way to read the market’s appetite for leverage.
Basis on regulated venues
Regulated futures, such as those traded on CME, often show the basis most cleanly, because the contracts are dated, cash-settled and widely used by institutions for hedging and basis trades. A large part of the annualised premium on these contracts is attributed to arbitrage trading, but how much varies, and the premium can shrink fast when conditions change.
What the basis may indicate
- A wide positive basis suggests strong appetite for leveraged longs and may coincide with optimistic market sentiment. It can also mean arbitrage capacity is limited.
- A narrow basis can mean demand for leverage is lower or that arbitrage capital is abundant.
- A negative basis (backwardation) can reflect fear, forced selling, or concerns about holding the underlying.
These are tendencies, not rules. A high basis has persisted for long stretches, and it has also collapsed quickly during sell-offs when longs were liquidated. As a result, the basis is better read as a description of current positioning and funding conditions than as a predictor.
Risks and cautions
- The “free” return in a basis trade is not risk free. Margin calls, exchange failures, withdrawal delays and counterparty risk can all hurt.
- Annualised figures assume the gap is stable, which it is not.
- Different exchanges and expiries show different bases, so a single number is incomplete.
Cryptocurrency prices are volatile, past premiums do not predict future ones, and people can lose all they invest. This article is educational and is not financial, tax or legal advice.