Funding Rate in Crypto
The funding rate in crypto is linked to futures and speculation. This means that this rate has absolutely nothing to do with the spot market. It is known that the spot market is the one where you buy digital currencies for the purpose of owning them. You can then take these currencies and transfer them to a hot wallet or even lend them or mortgage them or do whatever you want with them. As for speculation, it is through futures contracts, which are bet on the direction of prices only. Therefore, when you enter into a purchase contract for Bitcoin for $ 100, for example, on futures contracts, you do not own the equivalent of $ 100 in Bitcoin, but you are betting $ 100 on the rise of Bitcoin and if you are right, you will win. Therefore, always remember that speculation is a bet on the price movement and not owning the currency.
The funding rate is a tool that measures the level of these bets in the market. Some people are betting on Bitcoin going up and some are betting on it going down. The funding rate simply tells us which side is bigger than the other. The funding rate is usually measured every 8 hours in crypto as a percentage. So if the funding rate is positive, it means that there are more buy orders than sell orders, while if it is negative, it means that there are more short sellers.
When the financing rate is positive, the buyer pays the seller the percentage of the rate every 8 hours. When the rate is negative, the seller pays the buyer the percentage every 8 hours.
Here you should know a very important difference between futures and the spot market, which is the funding rate. It is very easy to buy Bitcoin from the spot market and keep it for a year, for example, and then sell it, and the fees will be very low. However, if you speculate, every 8 hours you will be exposed to the funding rate, and if you are a buyer, the more positive it is, a portion of your capital placed in the deal will be deducted to pay this rate. Some novice traders leave their deals open for very long periods of time on futures contracts, thinking that they are making big profits, and then they are surprised that the funding rate has eliminated most of the deal capital. This is because the deal has been open for many weeks. Therefore, even if the funding rate does not exceed 0.001%, if you pay this percentage three times a day for 3 months, for example, you will undoubtedly end up paying a very large amount. For this reason, you must be very careful when you want to open long-term deals on futures contracts due to the impact of the funding rate in crypto. If you are confident that prices will rise and you are a buyer and the financing rate is positive, it is better to calculate the financing rate through reliable sites for this. Perhaps after calculating the difference, you will find that you are losing in the deal.
