Hello everyone, this is Risk One, your exclusive analyst, currently only active in Binance Square.
In recent days, with the surge in TRB, the market related to it has also become hot. In an article related to TRB that I published earlier, I analyzed the ins and outs of TRB in more detail. If I were to write more detailed, I would probably not be able to write more than 5K words, so I came up with the idea of writing a few more articles to analyze TRB and the logic behind it.
This is the origin of this article, which is also the second long article in the TRB series. Next, let’s get into the main text.
1. Generation of Funding Rate
According to online information, the funding rate mechanism was first introduced in May 2016 by BitMEX on Bitcoin-based perpetual contracts, and was quickly adopted by other exchanges.
The purpose of the funding rate is to balance the perpetual contract and the spot price so that there is not a big deviation between the two prices. Generally speaking, when the contract price is lower than the spot price, the funding rate is negative, which means that the market subsidizes the air force and encourages traders to open short transactions. When the contract price is higher than the spot price, the funding rate is positive.
For example, when the price of Bitcoin is 63,000, the price of the perpetual contract is 65,000. The contract price is higher than the spot price, which means that the contract price has been raised by the longs. In order to balance the price, the funding rate will turn positive. The greater the price deviation, the greater the funding rate. On the contrary, if the price of Bitcoin is 65,000 and the price of the perpetual contract is 63,000, the contract price is lower than the spot price, which means that the contract price has been suppressed by the shorts, and the funding rate will be negative.
Through the settlement rule of funding rate, the exchange can quickly adjust the spot and contract prices of a currency when the market is full of extreme emotions towards a certain currency, so that the prices of the two will eventually remain relatively consistent. From this point of view, the original purpose of the exchange is to maintain a balanced price in the spot and contract markets and reduce the trading risks of the majority of traders, which is worthy of praise.
However, the dragon slayer will eventually become the dragon. Faced with traders who go all in with their cards openly and faced with the huge profits that may arise, will the exchange really remain indifferent?
Link source: https://zhuanlan.zhihu.com/p/625069720
2. Calculation of Funding Costs
Single currency funding fee = funding rate * number of positions (remember it is the number of positions, not the margin)
According to the current Binance rules, the upper limit of the funding rate is a maximum of plus or minus 3%, and the fastest settlement frequency of the funding rate is once every 4 hours, which is equivalent to 6 settlements a day.
Taking the most popular #UMA as an example, the current spot price of UMA is -2% of UMA’s funding rate, and the funding settlement frequency is once every 4 hours. That is to say, if you open a short position of 1000U now, and the price remains unchanged, you will have to pay 6 times of -2% funding fee every day, which is 1000U*2%*6 =120U in total. If you do nothing for a day, your funding fee of 120U will be deducted. In about 8 days, your position will be reduced to zero! ! ! ! ! ! ! ! ! Isn’t it exciting? This is the case when the price remains unchanged and leverage is not taken into account.
Therefore, it is recommended that brothers should avoid small currencies that suddenly explode on the list of rising currencies, unless you have a certain understanding of them or you are playing with a small position!
3. Application of TRB and other demon coins to funding rates
According to the above explanation of funding rate and funding fee, my dear brothers, whether you are long or short, do you still dare to trade the low market value and high control currency with full funding rate and a sharp rise or fall of 30 to 50 points in one day? Except for the brothers who are born with adventurous spirit and advocate one-wave trading, my personal suggestion is that the brothers who seek stability should try it cautiously after thoroughly understanding the funding exchange rate mechanism. After all, if the position is gone, everything is gone.
A truly great trader should understand the rules, apply the rules and even control the regulations. As the largest market participant (retail investors), we do not expect to control the rules, but the first two goals must be achieved, otherwise we will be like a friend of Risk No. 1. He made a profit of about 30% by opening a short contract, but a few days later he called the author and asked: Brother, didn’t I make money? Why is my total assets less?
Only by understanding the rules can you understand the risks involved, and only by applying the rules flexibly can you take advantage of the situation and obtain high returns in such a high-risk place as the contract market.
For those who are focused on contracts and are not willing to do spot operations, my personal suggestion is to understand the relevant rules of the funding rate before doing any operations. As for the remaining position management, stop profit and stop loss, etc., everyone has their own unique understanding style. I hope it is the most suitable for you and can make you a lot of money.
Before 2023, the application of funding rates by market makers was still in a relatively rough stage. Often, a wave of flows would last for three to five days, and they would be satisfied with the 2% funding rate three times a day. Among them, the typical representatives last year were BLZ, STMX, LPT, UNFI, etc. They all attracted the attention of retail investors by occupying the list of gainers, and gradually increased the contract holdings after gaining enough attention, and finally obtained corresponding profits through funding fee settlement.
The dealer with strong control technology may be able to eat the funding rate for half a month through multiple surges and plunges. As mentioned before, the representatives include LPT, STMX, BLZ and other currencies. Why is it so impressive? Because the author has lost money on these currencies!
Just like what I said in my first article about TRB, everything started to go crazy after the exchange changed the rules. The dealer of TRB, the king of demon coins, became the party that made the most profit after the rule change (I won’t speculate whether the exchange was involved here). An epic trading method that was recorded in history was born, and it had a profound impact on the entire contract market.
Will TRB continue to go crazy? Will UMA follow TRB's example? This will be verified in the future.
4. Arbitrage
This is not a special term in the cryptocurrency market. Those who are interested and have not known about it before can check the relevant information online to gain a certain understanding.
Personally, I understand that the generation of arbitrage and funding rates both come from price differences. It is said that the former founder of FTX, SBF, who is now in jail, earned his first pot of gold through arbitrage. I will not explain in detail here.
At the same time, if you are not a professional arbitrage trader, my personal understanding and application of arbitrage or risk hedging is that when you already have a position, facing the uncertainty of the next market, and do not want to avoid risks by selling the currency you hold, you can lock in part of the profit or even all the profit by opening a reverse contract. Of course, the premise is that the direction of the funding rate is friendly to you, otherwise it will not be worth the loss.
In the cryptocurrency market, I think the following paragraph explains arbitrage best and most clearly.
Arbitrage, also known as "hedging" and "spread trading", usually refers to buying at a lower price and selling at a higher price when there are two prices for a certain physical asset or financial asset (in the same market or different markets), thereby obtaining risk-free returns. Arbitrage trading does not directly predict future price changes of futures contracts, but predicts changes in price spreads caused by changes in future supply and demand, which reduces the difficulty of prediction. There are many forms of arbitrage, including cross-product arbitrage, cross-contract arbitrage, cross-market arbitrage, etc. Arbitrage trading can take advantage of changes in price spreads between related markets or related electronic contracts, and conduct transactions in the opposite direction on related markets or related electronic contracts in the expectation of changes in price spreads and profits. Arbitrage trading usually involves establishing a position in a certain market or financial instrument, and then establishing a position in another market or financial instrument to offset the previous position. After the price returns to the equilibrium level, all positions can be closed to realize profits.
Cross-product arbitrage
Cross-product arbitrage generally refers to the act of obtaining two-way benefits by opening long positions in contract currencies with negative funding rates and short positions in contract currencies with positive funding rates in perpetual contracts on the same exchange, while hedging long positions with short positions. In the Binance mobile version, we can easily find the funding rates of all currencies in the contract interface and sort them. (Thumbs up for this feature, which also shows how important the funding rate is).
a brief introdction 
How to enter the funding rate interface 
Funding rate details interface Cross-contract arbitrage
The so-called inter-period arbitrage is to establish trading positions of equal quantity and opposite direction on the contracts of different months of the same futures product, and finally end the transaction by hedging or delivery to obtain profits. The simplest inter-period arbitrage is to buy the near-term futures product and sell the far-term futures product.
Cross-market arbitrage
In the cryptocurrency market, because exchanges have different calculation rules for funding rates, the funding rates of the same cryptocurrency on different exchanges are different, which creates the basis for cross-market arbitrage. Previously, the software in the picture below seemed to directly provide an arbitrage section, but now there is only an arbitrage club, so it is not easy to directly find screenshots of cross-market arbitrage.
Because I have not done much arbitrage trading, my explanation of arbitrage may not be very professional or clear. Brothers who have knowledge about this are welcome to reply in the comment area. Brothers who want to know more relevant information can also check the relevant information online.
5. Conclusion
Your cognition determines your earning potential. You will never earn money beyond your cognition, unless you go all-in in the short term. The first requirement for a qualified trader is to manage his or her positions well, and then to deal with each transaction. Don't let a single transaction drag down your future. The example of TRB is an obvious lesson from the past! !
As an original author who is motivated to publish his understanding of the cryptocurrency market through writing articles, I hope to meet a group of like-minded crypto friends through this method to communicate and learn together, and I also hope to be able to help some newcomers who have just entered this industry. I will publish my understanding and application of position management later, and hope to be of some help to the brothers who read my articles!
All my articles are original or re-created. Welcome everyone to follow me. I hope to provide you with some useful analysis. At the same time, I only post on Binance Square. I don’t have any contact information or accounts outside the square. Please feel free to read them.
