Contango & Backwardation

These terms describe the sign and shape of the futures curve relative to spot.

Contango: futures above spot, later expiries higher still, a positive basis. In crypto this is the default state of bull and neutral markets, driven by demand for levered long exposure.

Backwardation: futures below spot, a negative basis. In crypto it's rare and diagnostic. It appears in acute fear, when traders pay a premium for immediate spot or hedge aggressively with shorts, as in sharp crashes.

Why the regime matters

The curve's shape decides which carry trade exists. In contango, the cash-and-carry works: buy spot, short the rich future, collect the premium as it decays. In backwardation only the reverse carry pays (short spot or lend it, long the cheap future), which is operationally harder in crypto. That difficulty is part of why deep backwardation tends to be brief.

The math footnote

Backwardation is also why quantitative basis signals should be expressed as annualized percentages or F/S ratios rather than the raw F − S spread. A signal series that crosses zero breaks any logic built on percentage changes of the signal itself.

On AlphaProve

Perps carry no dated curve, but they hold the same regime information in a single number: the funding sign. Positive funding means the perp trades rich to spot — the perp analog of contango — while negative funding marks the backwardation-like discount, and a strategy can read that sign straight from ctx.latest_funding_rate to fade or filter crowded conditions. The math footnote above still bites: because funding crosses zero, write the rule against the signed rate itself rather than percentage changes of it.