Funding Rate in Scalping Trades: What You Need to Know
Have you noticed the funding rate for #RARE today? Two key points stand out: the rate is at -1.6661%, and there's a countdown indicating 1 hour and 56 minutes left. But what does a negative funding rate like this actually mean? It highlights the difference between the SPOT price and the FUTURES price.
When the funding rate is negative, it indicates that the FUTURES price is lower than the SPOT price. Conversely, in a bullish market, a positive funding rate (e.g., +2%, +3%) signifies that the FUTURES price is higher than the SPOT price.
A significant negative funding rate like -1.6661% reveals a considerable gap between the SPOT and FUTURES markets. For example, as seen in the second image, #RARE's SPOT price is $0.2236, while the FUTURES price is $0.2147—a difference of about 3-5%. This discrepancy encourages buying in the FUTURES market, pushing the FUTURES price closer to the SPOT price.
But what happens when this -1.6661% funding rate expires in 1 hour and 56 minutes? Here's the key point: If you hold a $10,000 SHORT position in the FUTURES market when the funding rate expires, you'll be charged 1.6661%, or $166.61. This is because the exchange, like Binance, discourages SHORT positions and incentivizes LONG positions instead.
On the other hand, if you're in a $10,000 LONG position at the time of expiration, you'll actually receive $166.61. The payment comes from those in SHORT positions who must pay the 1.6661% fee to those in LONG positions.
Typically, when such a large price discrepancy exists, the FUTURES market tends to surge to align with the SPOT market price. Why? Because no one wants to lose 1.6661% when the funding rate expires. This often results in a significant sell-off as traders in LONG positions close out to secure their 1.6661% profit.
