Funding rates are the rates set by cryptocurrency exchanges to maintain the balance between contract prices and the prices of the underlying assets, typically applicable to perpetual contracts. It is a mechanism for fund exchange between long and short traders, used to adjust the costs or profits of traders holding contracts, keeping contract prices close to the prices of the underlying assets.
When the price of a perpetual contract deviates from the price of the underlying asset, the exchange will adjust the funding rate to prompt longs or shorts to pay funding in the opposite direction, thus bringing the contract price back to the price of the underlying asset.
When the market trend is bullish, the funding rate is usually positive and increases over time. At this time, longs will pay the funding rate to shorts. Conversely, when the market is bearish, the funding rate is usually negative, and shorts will pay fees to longs.
Generally, the maximum cap for Bitcoin funding rates is 0.375%, with a minimum limit of -0.375%, though there may be some differences among exchanges.
The calculation of the funding rate is generally based on the market interest rate and the difference between the contract price and the price of the underlying asset. It is usually settled at fixed time intervals (such as every 8 hours), and some exchanges settle hourly, charging or paying funding rates to longs or shorts at settlement.
How is the funding fee calculated?
The funding fee is calculated using the following formula:
Funding Fee = Position Notional Value * Funding Rate
Position notional value = Marked price x Number of U-based contracts held;
or Position notional value = Contract multiplier x Number of contracts held / Coin-based contract marked price
On cryptocurrency trading platforms, the funding fee for all perpetual contracts is generally calculated every 8 hours, with calculation times at 08:00, 16:00, and 24:00 Hong Kong time. Only when traders hold positions in any direction at the time of funding fee collection will they be charged or pay the corresponding funding rate. If there are no positions held at that time, no funding fees will be charged or paid. Please note: There is a 15-second deviation in the actual charging time of the funding rate. For example, if user A opens a position at 08:00:05 Hong Kong time, user A may still be charged or pay the funding rate, so please pay attention to your opening time.
What determines the funding rate?
The funding rate consists of two parts: the interest rate and the premium.
Among them, the premium explains why the price of perpetual contracts will trend in line with the price changes of the underlying asset. The exchange uses a fixed interest rate in the funding rate, assuming that holding cash earns more interest than holding an equivalent amount of BTC. By default, the interest rate is set at 0.03% per day (calculated every 8 hours, with each funding rate settlement period being 0.01%). The exchange reserves the right to adjust the interest rate at any time based on market conditions. During periods of high volatility, the prices of perpetual contracts and marked prices may diverge. At this point, the premium index will be used to drive the contract market price and the spot price to converge. The premium index for each contract is calculated separately.
The formula is as follows: Premium Index (P) = [Max(0, Impact Buy Price - Price Index) - Max(0, Price Index - Impact Sell Price)] / Price Index
Impact buy price = Average price when the buy queue reaches the 'Impact Margin Amount'
Impact sell price = Average price when the sell queue reaches the 'Impact Margin Amount'
The price index is the weighted average of the spot underlying asset listed on major cryptocurrency exchanges.
Impact Margin Amount (Impact Margin Notional, IMN) is used to locate the average price of impact buy or sell prices in the order book.
For U-based perpetual contracts, the impact margin amount refers to the amount that can be traded with 200 USDT as margin (valued in USDT), while for coin-based contracts, it refers to the amount that can be traded with 200 USD as margin (valued in USD). Impact margin amount = 200 USDT / Initial margin rate at the maximum leverage level of the contract. For example, the maximum leverage of the BTCUSDT perpetual contract is 125x, with a corresponding initial margin rate of 0.8%, hence the impact margin amount is 25,000 USDT (200 USDT / 0.8%). The system will take the impact margin amount at 25,000 USDT per minute in the order book to measure the average impact buy/sell price.
