Backwardation….is a term used in futures markets to describe a situation where the price of a commodity or asset for future delivery (the futures price) is lower than its current spot price.

Backwardation aka the "Urgency Premium"

In layman's terms, Backwardation is when people are willing to pay more for a commodity right now than they are willing to pay for it in the future.

It's the opposite of the "normal" market situation (called Contango), where future prices are usually slightly higher to account for costs like storage, insurance, and interest (the "cost of carrying" the asset).

Market State: Backwardation
- Price relationship: Price (Now) > Futures Price (Later)
- Why/when it happens (The Signal): There is an urgent shortage or a big demand right now that is expected to be solved or ease up in the future.
Market State: Contango (Normal)
- Price relationship: Spot Price (Now) < Futures Price (Later)
- Why/when it happens (The Signal): The market is stable, and the price difference simply covers the cost of storing and holding the asset until the future date.

An Analogy

Imagine you are running a large trucking company that relies on diesel fuel.

Spot Price: The price you pay for diesel at the pump today.
Futures Price: The price you agree to pay three months from now for a delivery of diesel.

Scenario: Backwardation (The Crisis)

Today's Price (Spot): $4.50 per gallon.
Future Price (3 Months): $4.00 per gallon.
The Signal: The market is in Backwardation.
Why? A major oil refinery just went offline unexpectedly, or a harsh blizzard is preventing tanker trucks from making deliveries.
- Urgency: Your trucks have to keep running today. You are willing to pay the premium price of $4.50 at the pump because you desperately need the fuel right now to avoid shutting down.
- Future Expectation: The market believes the refinery will be fixed, or the blizzard will pass in three months. Therefore, they expect supply to be normal again, and the price will drop back to $4.00.

Backwardation tells you there is a problem with supply or a massive spike in demand in the present moment.

Key

When a market is in backwardation, it signals to traders and businesses that the current supply situation is tight or that there's an overwhelming immediate demand. It’s the market’s way of saying: "What I have in my hand right now is exceptionally valuable because it's so hard to get!"

https://www.dbm.academy/faq for more blockchain vocabulary.

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