We all know that cryptocurrencies are open 24 hours a day. They are always running all day long. And because a large number of cryptocurrency investors are Americans, their trading hours are basically opposite to ours. This is actually quite disadvantageous for Chinese people to invest in cryptocurrencies, because we are all asleep, and cryptocurrencies only become active, and especially at 12 or 4 in the morning, it is easy for something to go wrong. What wakes you up is not the alarm clock, but the reminder that your contract is about to be liquidated. I understand that kind of pain, after all, I have also suffered from this torture.
So what is the magic of 12 o'clock in the morning? Why is there a wave of market every time the time comes? This is related to what I want to talk about today. I believe that those who play perpetual contracts should have heard of the funding rate. It is not only a tool to balance the contract price and the spot price, but it can also be used for arbitrage. But I will not talk about this part today. I will only give a very simple introduction. Friends who are interested can click to follow and wait for me to write an article about this matter later.
Before talking about funding rates, we still have to talk a little about perpetual contracts. If you break it down, perpetual contracts have two characteristics: one is perpetual, and the other is a contract. As the name suggests, it is a contract that exists forever. Unless the contract is broken, it will not expire. This contract is like the delivery contract that everyone often hears about in the traditional financial market. The delivery means that the bank will settle the account when the time comes, but the perpetual contract does not have that time. Do you understand? Because it has no time limit, the currency price in the perpetual contract market is not the same as the spot market. It is separate.
Every day, people play contracts. Everyone opens contracts at different times, and everyone is in a state of floating profit or loss. So it is difficult to set the price. After all, it fluctuates every day. God knows when you will close it, or when it will suddenly explode. Closing a position means buying or selling. Suppose you are long, and you are in a state of floating profit. If you close it, does it mean that you have sold it? Then is it short in reverse? If you short and explode, what does it mean? Does it mean that you are forced to spend money to buy it to compensate others? When the position explodes, the fair price of the contract will also change. #BTC
If a 1 million U account is liquidated today, you will see a violent price fluctuation, because 1 million U is multiplied by 5, which means that it borrowed 4 million U from the exchange. This amount is suddenly added to the market, which is a very scary thing. So in order to maintain the supply of the contract, the price has a funding rate. The English name of the funding rate is funding rates. Its logic is very simple. If it is positive, it means that the overall market is bullish. Since it is bullish, the long side has to pay the short side. On the other hand, if it is negative, it means that the overall market is bearish and the market sentiment is pessimistic, so the short side has to pay the long side. The exchange will execute the funding rate mechanism at a fixed time every day. The time period for each exchange is different. Some exchanges collect once a day, but most of them collect three times a day. What are the times of these three times? There are 24 hours in a day, 24 hours divided by 3 times, so each time will be 8 hours apart, the first one will be at 8 am, the next one will be at 4 pm, and the last one will be at 12 am.
That is why the price is prone to fluctuations at these time points, because some of these whales will open a reverse perpetual contract to hedge the floating profit contract in their hands in order to avoid being charged funding fees. In this way, they will pay their own funding fees. To be honest, I personally think that the algorithm of the funding rate is a bit complicated. Its formula is the premium index multiplied by the contract value multiplied by the interest rate. The premium index refers to the difference between the contract price and the mark price. The mark price is calculated based on the contract index or spot index used by the exchange, so the premium index will also fluctuate with market supply and demand, contract liquidity and trading volume. The interest rate is also set by the exchange, but it is usually fixed. There will be different interest rates depending on market conditions, the exchange's own policies and other relevant factors. #Binance
Does it sound complicated? In fact, its calculation formula is not that important. You just need to know its principle. So what can we do with the funding rate? Did I mention that you can make money? But let's not talk about this today. Let's talk about how the funding rate can help us improve our trading success rate. As I just mentioned, the positive or negative of the funding rate represents the overall market sentiment. If it is positive, it means that it is optimistic, but if it makes too much money, it means that it is a little too optimistic. Then you longs should pay a little attention. Logically speaking, it is a bit like the overbought RSI. Through market sentiment, we can help us operate more cautiously in trading, and this funding rate is usually 0.01%. If the difference between the contract price and the spot price is too large, the funding rate will increase, otherwise it will be lower than 0.01%. The exchange will also clearly display the maximum and minimum of this funding rate. Usually the funding rate is around 0.01%. But don’t think 0.01% is too little. It will be charged 3 times a day, which is 0.03%. Assuming your contract position is 1 million U, you will be charged 100 U every 8 hours as long as you are in a floating profit state.
Okay, this article ends here, see you next time!