ELI5 - What is Funding Fee in terms of $BTC

In the world of Bitcoin futures trading, the funding fee is a small payment made between traders to keep the price of the futures contract close to the actual price of Bitcoin (called the "spot price").

Here’s how it works:

Futures Contract: This is an agreement to buy or sell Bitcoin at a future date for a price agreed upon today.

Price Difference: Sometimes, the price of the futures contract can be higher or lower than the actual current price of Bitcoin. This difference can be due to market expectations or demand.

Funding Fee Role: To keep the futures price close to the actual price of Bitcoin, exchanges use the funding fee.

How It's Paid: If the futures price is higher than the actual price of Bitcoin, those who are betting the price will go up (long traders) will pay a fee to those betting the price will go down (short traders). If the futures price is lower, the short traders will pay the long traders.

Purpose: This system ensures that the futures price and the actual Bitcoin price don't drift too far apart. It helps maintain market stability.

Example:

Imagine the current price of Bitcoin is $50,000.

If the futures price is $51,000, long traders might pay a funding fee to short traders to incentivize the price to come closer to $50,000.If the futures price is $49,000, short traders might pay a funding fee to long traders to bring the price up towards $50,000.

So, the funding fee is like a small balancing act to keep the futures market and the actual Bitcoin market in sync.

Now, $ENA has negative Funding Fee Rate, it means if you open long position on it, you will earn money by funding fees!