Basis is the difference between a futures price and spot. For dated futures, plotting basis across expiries gives the futures curve, whose shape is a clean read on market sentiment and the cost of leverage.
Contango vs. backwardation
- Contango — futures priced above spot (upward curve). Normal in bull phases; traders pay a premium to be long with leverage.
- Backwardation — futures below spot (downward curve). Less common; often signals fear or strong demand for spot over leverage.
- Annualised basis — the premium expressed as a yearly rate; a quick gauge of how expensive long leverage is.
What extremes signal
A very high annualised basis means leverage is crowded and expensive — froth that often precedes a deleveraging. Backwardation or a collapsing basis after a sell-off can mark capitulation. Like funding, basis is a positioning and sentiment gauge, not a standalone timing tool.
Basis and funding
For perps, funding is essentially the continuous cousin of basis — both measure how much traders will pay to hold leveraged exposure. Read together with OI, a rising basis on rising OI is the same over-leveraged signature you saw earlier, expressed through price instead of a funding payment.