1. What is the Funding Rate?
The funding rate is the price difference between the perpetual futures market price and the spot price, and it involves regular exchanges of funding fees between long and short traders. When the market is trending upward and the funding rate is positive, long traders of perpetual futures will pay funding fees to short traders. Conversely, when the market is trending downward and the funding rate is negative, short traders of perpetual futures will pay funding fees to long traders.
2. Why is the Funding Rate Mechanism Necessary?
The primary purpose of the funding rate mechanism is to allow the market to self-regulate by facilitating the regular exchange of funding fees between long and short traders, thereby anchoring the perpetual futures market price to the spot price.
Perpetual futures do not have an expiration date and can be held indefinitely as long as they are not liquidated. This makes perpetual futures trading similar to spot trading. However, in order to ensure that the perpetual futures market price stays close to the spot price, a mechanism is required to anchor the price, which is where the funding rate mechanism comes into play.
3. How is the Funding Rate Calculated?
3.1 USDT-M Perpetual Contracts Funding Rate Calculation:
Funding Fee = Position Value x Funding Rate
Position Value = Quantity Held (in tokens) x Mark Price
Example: Trader A holds a long position of 10 BTC in BTC/USDT perpetual futures, and the current mark price is 10,000 USDT. The current funding rate is 0.01%.
Current Position Value = 10 x 10,000 = 100,000 USDT
Funding Fee = 100,000 x 0.01% = 10 USDT
Since the funding rate is positive (0.01%), the long position holders must pay this fee to the short position holders. Therefore, Trader A needs to pay 10 USDT as the funding fee, while the short position holder with an equal futures quantity will receive 10 USDT as the funding fee.
4. How to Check the Funding Rate
On the futures trading page, you can view the current upcoming funding rate above the K-line chart. The countdown indicates the time remaining until the settlement period.
Note: The funding rates for different trading pairs may vary.
5. Funding Fee Settlement Period
Biconomy does not charge any funding fees to users. Instead, funding fees are collected between position-holding users.
All Biconomy perpetual contracts are set to settle funding fees every 8 hours at 00:00 UTC, 08:00 UTC, and 16:00 UTC.
Traders are only required to pay or receive funding fees if they hold positions at the funding fee settlement time. If you close your position before the funding fee settlement time, you will not incur any funding fees.
If the funding rate is positive, long positions will pay funding fees to short positions. Conversely, if the funding rate is negative, short positions will pay funding fees to long positions.
The funding fees paid by traders will be deducted from their available margin. When a trader does not have sufficient available margin, the funding fee will be deducted from the position margin. In this case, the liquidation price will gradually approach the mark price due to the deduction of funding fees, thus increasing the risk of liquidation.
In the cryptocurrency futures market, the funding rate plays a crucial role, ensuring that the price difference between the futures and spot market stays within equilibrium, allowing prices to return to normal levels. Overall, this serves to restrict malicious manipulation of futures prices. In the short term, funding rates are explicit indicators of market liquidity and activity, indicating investors' willingness to pay fees for leverage.
Disclaimer: Cryptocurrency trading involves risk. This information does not provide advice on investment, taxation, legal, financial, accounting, or any other related services, nor does it constitute advice to purchase, sell, or hold any assets. Biconomy Learn provides information for reference purposes only and does not constitute investment advice. Please ensure you fully understand the risks involved and exercise caution when investing. The platform is not responsible for users' investment decisions.