Funding Rates in Perpetual
Futures funding rates are an essential aspect of trading perpetual contracts on the platform. In this article, we will provide a brief overview of funding rates, their importance, and how they are calculated on the platform.
What is the Funding Rate?
The funding rate is a periodic payment made to either long or short traders, calculated based on the difference between the perpetual contract prices and spot prices. In bullish markets, the funding rate is positive and tends to rise over time. Traders long on a perpetual contract will pay a funding fee to traders on the opposing side. Conversely, the funding rate will be negative when the market is bearish, where traders short on a perpetual contract will pay a funding fee to long traders.
Why is the Funding Rate important?
The funding rate is crucial in ensuring that perpetual contract prices correspond to the index. Unlike traditional futures, perpetual contracts have no expiration date, allowing traders to hold positions indefinitely. Therefore, trading perpetual contracts is similar to spot trading pairs. To force the convergence of prices between the perpetual contract and the underlying asset, crypto exchanges created the funding rate mechanism.
How are Funding Rates calculated on the platform?
Our platform calculates funding rates using the following formula:
Funding Amount = Nominal Value of Positions * Funding Rate
(Nominal Value of Positions = Mark Price * Size of a Contract)
The platform does not charge any fees from funding rate transfers as funding fees are transferred directly between traders. Funding payments occur every 8 hours at 00:00 UTC, 08:00 UTC, and 16:00 UTC for all the platform’s Futures perpetual contracts.
In extreme market volatility situations, our platform reserves the right to update the funding interval of a perpetual contract that differs from the default 8-hour funding interval according to the funding interval adjustment rules mentioned in Section 8 ‘Adjustment of Funding Interval’ below.
Traders are only liable for funding payments in either direction if they have open positions at the pre-specified funding times. If traders do not have a position, they are not liable for any funding. If you close your position prior to the funding time, you will not pay or receive any funding.
There is a 15-second deviation in the actual funding fee transaction time. For example, when a trader opens a position at 08:00:05 UTC, the funding fee could still apply to the trader (either paying or receiving the funding fee).
Understanding Funding Rates
Funding rates play a critical role in cryptocurrency futures trading. They are used to adjust the price of a perpetual contract to the price of the underlying asset. The platform provides real-time funding rates for its futures contracts, which are calculated based on the premium index and interest rates.
What Determines the Funding Rate?
The funding rate of a platform is primarily tracked and adjusted based on the funding rate of major markets. It consists of two components: the interest rate and the premium. The premium is the reason why the price of a perpetual contract converges with the price of the underlying asset. Binance uses a flat interest rate, which assumes that holding cash equivalent returns a higher interest rate than BTC equivalent.
Understanding the Premium Index
There may be a significant difference in price between the perpetual contract and the mark price. On such occasions, a premium index is used to enforce price convergence between the two markets. The premium index is calculated separately for every contract and is based on the impact bid and ask prices, the price index, and the impact margin notional.
Adjustment of Funding Interval
In the event of extreme market volatility, our platform reserves the right to update the funding rate floor and cap, as well as the funding interval of a perpetual contract that differs from the default 8-hour funding interval. The latest funding interval and funding rate cap/floor can be found on the Real-Time Funding Rate and Funding Rate History pages. Funding fees, if any, will be deducted from the available balance in your future wallet. If your wallet balance is insufficient, the funding fees will be deducted from your position margin, which may affect your liquidation price.
FAQs
What is the funding rate in cryptocurrency futures trading? A funding rate is a mechanism used to adjust the price of a perpetual contract to the price of the underlying asset.
What is a premium index, and how is it calculated? A premium index is used to enforce price convergence between the perpetual contract and the mark price. It is calculated based on the impact bid and ask prices, the price index, and the impact margin notional.
What happens if the funding interval is adjusted? In the event of extreme market volatility, our platform reserves the right to update the funding rate floor and cap, as well as the funding interval of a perpetual contract that differs from the default 8-hour funding interval.
How are funding fees calculated? Funding fees are calculated based on the funding rate and the size of your position. They are deducted from the available balance in your futures wallet. If your wallet balance is insufficient, they will be deducted from your position margin.
How can I manage my positions to avoid liquidation risks? To avoid liquidation risks, it is important to manage your positions carefully and ensure that you have sufficient funds in your futures wallet to cover funding fees and potential losses. It is also recommended to use stop-loss orders and take-profit orders to limit your risk.
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