Funding Rate is a popular concept in the cryptocurrency world, especially in the Futures and Options trading markets on exchanges. So what specifically is Funding Rate?
Funding Rate or Funding Fee is the interest rate or transaction fee that is paid periodically to investors who are buying or selling short. The purpose of this fee is to maintain a balance between the futures contract price and the actual market price.
Normally, Funding Rate is calculated according to the difference between asset prices in Spot and Futures. Additionally, it is expressed as a percentage.
Traders are paid or have to pay depending on the position and funding rate, specifically:
Funding Rate is positive: Asset Futures price is higher than Spot price, Trader placing Long order pays the Trader placing Short order.
Funding Rate at negative level: Asset Futures price is lower than Spot price, Trader placing Short order pays the Trader placing Long order.
In fact, Funding Rate can be considered as a tool to express Trader and market psychology. During important periods such as Bull Market and Funding Rate, if it is positive, investors will have optimistic psychology and vice versa.
Note, Funding Rate can sometimes increase or decrease rapidly and cannot be predicted.
Why must there be Funding Rate on the floor?
Funding Rate is necessary in cryptocurrency transactions. It has many great goals and functions such as:
Create a balance between buyers and sellers: When the Futures price of a cryptocurrency asset changes, it will help reduce risks for the exchange. It also ensures market stability.
Limiting easy profits: Without Funding Rate, parties can take advantage of the gap between the price difference between Futures contracts and the market price.
Overcoming the phenomenon of price differences: Funding Rate changes the payment interest rate between parties to bring futures contract prices to a good level.
Maintain market liquidity and stability: Funding Rate makes the market more stable. Over time, it becomes more attractive to investors.
In general, Funding Rate was created to prevent market fluctuations. All in all, it ensures benefits for Traders.
How to calculate Funding Rate most accurately?
What is Funding Rate? And how to calculate it? You probably never knew, so let's continue to find out.
Normally, Funding Rate is calculated based on specific factors of the futures contract:
Funding Rate = Max(0, Min(Premium Index, Mark Price) – Fair Price) / Funding Interval
In there:
Premium Index: It is an index based on the difference between the futures price and the actual market price. Calculated by taking the future price and subtracting the market price. Then divide it by the market price and multiply by 100.
Mark Price: Is the current price of a futures contract. It is calculated by taking the average value of several recent transactions. Mark Price is used to determine the daily closing price and related payouts.
Fair Price: The future price of the contract without the influence of Funding Rate. Its value is usually equal to Mark Price.
Funding Interval: Is the time between Funding Rate calculations, usually every 8 hours or depending on the exchange.
In general, you can quickly calculate as follows:
Funding Fee = Total open position volume X Funding Rate
Some limitations of Funding Rate remain
To be fair, Funding Rate itself can also have some impact on traders and exchanges.
Financial risk: If you do not understand how Funding Rate works, Traders may have to pay large amounts of money. When this happens a lot, it also causes significant property loss.
Deception: Funding Rate can follow an unpredictable trajectory. The seller can intentionally place a large buy or sell order to change the Premium Index and increase the Funding Rate. They do this precisely to profit. This will generally cause a loss of fairness in the market.
Increased transaction costs: As mentioned, Funding Rate often fluctuates and fluctuates strongly, factions may have to incur large transaction costs to maintain their positions.
Impact on liquidity: Sometimes too rapid changes in the Funding Rate can affect liquidity.
Short-term trading pressure: Funding Rate is calculated over time and can create pressure on stakeholders.
Make money with Funding Rate? Easy but requires a lot of attention
People who have an understanding of Funding Rate often take advantage of it to trade and bring a lot of profits. They use Funding Rate to judge market sentiment and make trading decisions easier. Traders have the ability to earn additional Funding Fees from some of the following strategies:
Find assets with positive Funding Rate: Long traders have to pay Short traders.
Split capital to buy Spot assets: At the same time open a Short position with peer-to-peer volume.
For example, Trader named For example, Funding Rate is 0.01%. Then, 1 day X receives 20,000 x 0.01% x 3 = 6 USD. Inferred, X will have 2190 USD/ 1 year and the APR will be 10.95%/ 1 year.
Basic properties when making money with Funding Rate
If you apply the method above, you need to consider the following notes:
This strategy introduced above can only be implemented when Ffunding Rate is positive.
Funding rates will frequently change. Therefore, it will not be possible to do it continuously.
Use small leverage to avoid price risk.
The above strategy is also a method of protecting investment portfolios.
You can try using it when the asset has a suddenly high Funding ratio.
Of course, you need to watch more videos and read more articles online to gain more experience.
General notes if you want to make money with Funding Rate?
Understand how it works: It is necessary to clearly understand how Funding Rate is calculated on the exchange. Try to master Premium Index, Mark Price and Funding Interval...
Learn about the specific exchange: Each exchange has its own way of calculating Funding Rate and the frequency may also be different (for example, every 8 hours, every 1 hour). This can create different opportunities or risks.
Good risk management: This transaction always comes with high risks. Make sure you have a solid strategy. Don't put all your money in one trade and use stop-loss at the right time.
Continuously monitor the market: The market is always changing and Funding Rate also changes over time.
Limit leverage: Using leverage when making money with Funding Rate is like a double-edged sword. Be very careful and always considerate.
Some terms related to Funding Rate
There is still a lot of related knowledge about Funding Rate, please continue to look through the useful information below. Here are some terms related to Funding Rate:
Funding Rate: Is the rate that the long party must pay to the short party, or vice versa. To maintain balance between positions in the futures market.
Long (Buyer): People who participate in the futures market in the hope that asset prices will increase.
Short (Seller): People who participate in the futures market in the hope that asset prices will fall.
Liquidation: Is the process of automatically selling futures contracts.
Perpetual Swap: A type of futures contract that does not have a specific expiration date.
Auto-Deleveraging (ADL): The process by which positions are liquidated automatically.
Funding Interval: The time interval between Funding Rate calculations.
Hopefully, through the above article, you have understood what Funding Rate is? It can be seen that its appearance is extremely important and any investor must pay attention.
