The Funding Fee is a periodic payment made to either long or short position traders, calculated based on the difference between the perpetual contract prices and spot prices.
When the market is bullish, the Funding Rate is positive and tends to rise over time. Traders who have long positions will pay a Funding Fee to traders who have short positions. When the market is bearish, the funding rate is negative, and traders who hold short positions must pay a funding fee to the long position traders.
Funding Fees are mainly used to encourage the perpetual contract and the underlying asset's prices to align. Perpetual contracts, unlike traditional futures, have no expiration date, and traders can hold positions indefinitely unless liquidated. As a result, crypto exchanges developed a system to ensure that perpetual contract prices match the index. This is referred to as the Funding Rate.
Futures contracts can be traded at a price that is different from the Mark Price*. In this case, the Premium Index increases or decreases the Funding Rate in the next funding period. The Interest Rate** and Premium Index are calculated every minute and stored in a time series. Then this minute-by-minute time series is used to calculate the time-weighted average value for a time period equal to the funding period.
The resulting averaged Interest Rate and Premium Index values are used to calculate the following funding rate:
Where, rf - Funding Rate, ip - Average Premium Index, ri - Average Interest Rate.
Сurrently Average Interest Rate is fixed at 0.01% per funding period.
The Funding ate is then applied to the Mark price* of the position to calculate the Funding Fee.
The Funding Fee is charged and paid every 8 hours. The time left to the next Funding is displayed on the chart. When the countdown counter reaches 0, a charge/payment occurs. Therefore, if you've placed a position after the counter started, and the position was realized before the counter expired, you will neither pay nor receive the funding.
The greater the Funding Rate, the higher the Funding Fees.
If the Funding Rate is greater than 0, for example, 0.01%, at the moment when the countdown reaches 0, traders with long positions will pay 0.01% from the size of their position (by Mark Price) to the traders holding short positions.
If the Funding Rate is less than 0, traders with short positions pay to the traders holding long positions.
In other words, the rate polarity (positive or negative) shows the payment direction, and the number shows the payment volume.
The Funding is charged or paid to a certain contract. Please note that Funding is not associated with trades (or trade fees and rebates). HitBTC receives no profit from the Funding payments because they are made directly between our traders.
*Mark Price – the price on the basis of which the decision to liquidate a position is made: the Mark price is compared with the liquidation price. When compared to the trading price, the Mark Price is an estimate of a contract's genuine value.
**Interest Rate – the difference between the rates of the base and quoted currencies - usually fixed and small.