Spot price explained — determining futures prices

A cryptocurrency’s spot price refers to the price at which a coin or token may be immediately bought or sold. While spot prices may vary from exchange to exchange, the largest cryptocurrencies’ spot prices are generally similar.

Spot prices are not to be confused with futures prices, which are agreed-upon prices for the future purchase or sale of a cryptocurrency. The former is used to determine the latter, creating a correlation.

Contango and backwardation

Cryptocurrency spot prices are always changing as buyers and sellers exchange coins or tokens. Though each exchange may have a different spot price, differences are generally small, as arbitragers seek to profit from these discrepancies — in turn, evening out the prices across the board.

Though spot prices are relevant to traders seeking immediate sales or purchases, they are also relevant to the derivatives market — which largely depends on accurate spot prices. They may significantly diverge from futures prices, however, as the latter may end up in contango or backwardation:

  • Contango occurs when futures prices decrease in order to match lower spot prices.
  • Backwardation occurs when futures prices increase to match higher spot prices.

Futures markets may move between these two states for short or long periods of time, depending on various market conditions.

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