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What is basis in crypto?


Basis refers to the difference between the spot price of a commodity or asset and the price of the corresponding futures contract. It reflects the relationship between the cash market and the futures market.

Basis is commonly used to measure market supply-demand dynamics and price trends. When the basis is positive, it indicates that the spot price is higher than the futures price, which may suggest tight supply or strong demand and a bullish market sentiment. Conversely, when the basis is negative, it indicates that the spot price is lower than the futures price, which may suggest oversupply or weak demand and a bearish market sentiment.

The movement of the basis can be influenced by various factors, including seasonal demand changes, supply conditions, trader expectations, and market sentiment. Basis traders often attempt to profit from the basis movement through arbitrage or risk hedging strategies. They may simultaneously buy the cash asset and sell the corresponding futures contract to capture the price difference.

The meaning and application of basis vary across different markets. In agricultural markets, basis often reflects seasonal supply-demand changes and logistics costs. In energy markets, basis can be influenced by factors such as production, storage, and transportation. In financial markets, basis can reflect interest rate differentials and funding costs.

In cryptocurrency futures, we commonly refer to basis as "futures basis," which is the difference between the futures price and the spot index price.

In other words, futures basis = futures price - spot index price.

The price of a contract generally reflects the market's future expectations for the price of the cryptocurrency.

Therefore, when the basis is a large positive number, it indicates that investors are generally bullish and have a strong long sentiment. If the basis is negative and of a large magnitude, it suggests that investors are generally bearish and have a high short sentiment. By observing the contract basis, traders can understand the overall market trend and adjust their trading strategies accordingly.
 

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