TABLE OF CONTENTS
- What Is the Futures Funding Rate?
- Why Is the Futures Funding Rate Important?
- How Are the Funding Rate and Mark Price Calculated?
- How Is the Funding Rate Applied?
What Is the Futures Funding Rate?
The Funding Rate is a periodic payment made to either long or short position traders. It is 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. The long position traders will pay a Funding Rate to short position traders. Conversely, when the market is bearish, the funding rate is negative, and traders who hold short positions must pay a funding rate to those holding long positions.
Why Is the Futures Funding Rate Important?
Funding Rate is mainly used to encourage the alignment between the prices of perpetual contract and the underlying assets. Unlike traditional futures, perpetual contracts have no expiration date, and traders can hold positions indefinitely, unless they are 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.
How Are the Funding Rate and Mark Price Calculated?
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.
Futures contracts can be traded at a price that is different from the Mark Price. In this situation, the Premium Index is used to increase or decrease the Funding Rate in the next funding period:
ip = Premium Index
PIB = Impact Bid Price
PIA = Impact Ask Price
Pi = Index Price
Under Impact Price we assume the resulting best price after executing 200 USDT / Initial Margin rate at maximum leverage level. For BTC/USDT Perpetual contract it is equal to 20,000 USDT.
Index Price serves as a source of stable pricing of the underlying asset, which is essential given the high leverages normally employed while trading futures contracts.
This stability relies on the average price calculated among the following markets:
The exact price used is the last trade price acquired from the platform L1 market data.
Prices gathered from the platforms are taken into account only if they do not deviate from the median by more than 5%. Weights of providers may be distributed unevenly due to specific configuration or if some providers are idle or provide false data.
The Interest Rate and Premium Index are calculated every minute and stored for further averaging for a time period equal to the funding interval. The resulting averaged rI and ip values are used to calculate Funding Rate as follows:
rf - Funding Rate
ip - Average Premium Index
rI - Average Interest Rate
Currently, the Average Interest Rate is fixed at 0.01% per funding period. With the Funding Rate value, a "fair" basis for the contract may be calculated:
Bfair = "fair" basis
Pi = Index Price
rf = Funding Rate
t = time before next funding period
T = Funding Interval
The "fair" basis reflects the premium that the contract owner "deserves." Therefore, applying it to the spot price of the underlying asset allows to keep the Mark Price relatively close to the Index Price:
Pm = Mark Price
Bfair = "fair" basis
Pi = Index Price
How Is the Funding Rate Applied?
The Funding rate is then applied to the Mark Price of the position to calculate the Funding Rate.
The Funding Rate 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.
If the Funding Rate is greater than 0 at the moment when the countdown reaches 0, for example, 0.01%, traders in long positions will pay 0.01% from the size of their position (by Mark Price) to the traders in 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 amount. 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 – is 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 – is the difference between the rates of the base and quoted currencies, usually fixed and small.
Please note, we’re not offering any financial advice. It’s worth researching the topics of cryptocurrency, trading, and investing on your own or reaching out to professional advisors.