What are funding rates?

The term funding rates comes up quite often in futures terminology. Today we will look at what is behind this [...] https://www.pinterest.com/pin/1085437947660215829/

The term funding rates comes up quite often in futures terminology. Today, we will take a look at what is behind this term. What are funding rates? Funding rates are periodic payments. They are made to traders in long or short positions. They are based on differences between prices on futures and spot markets. Depending on the type of open position, traders will either receive "funding" or have to pay a fee. Funding rates in the cryptocurrency market help counteract the disparity in the prices of the two markets. Fees typically scale several times throughout the day. The most common practice with exchanges such an open position fee is charged every 8 hours. This is the case with Binance and BitMEX. Funding rates have two components: interest rate and premium. The interest rate is usually fixed - the platform determines it as a percentage of the value of each position. Their values usually fluctuate around several tenths of percent. Premium, on the other hand, is a variable value. Its value results from the mentioned difference between the price difference on the futures market and the spot price. In simple terms, a high spread between markets increases the premium value, while a low premium indicates a relatively low spread between the two prices. Funding rates in periods of high price volatility can develop in a dynamic way. What does the fee process look like? When the funding rate is positive, the price on futures contracts is higher than on the traditional market - then traders of long positions "pay off" their short positions. As we wrote earlier, the fee is charged on the exchanges usually every 8 hours. Geco.one offers an interesting alternative which also results from the withdrawal from the orderbook. In this case the fee is charged from the open position only once every 24 hours. How does this process affect traders? Funding rates can have a huge impact on a trader's final performance. With high leverage, a trader paying a funding rate may suffer a loss that may even lead to liquidation of his position (despite trading in a relatively stable market). On the other hand, fundraising can be profitable in markets with limited range. Traders often monitor funding rates and incorporate this mechanism into their trading strategies. Above all, funding rates are meant to encourage traders to take positions that keep futures contracts in the same price horizon as spot markets.   Tags Binance bitmexx funding rates geco.one