Binance funding rate, a structure and principle that beginners can understand
If you understand the concept and calculation method of the funding rate, you can maximize profits while minimizing losses, and even proactively deal with the risk of liquidation. Most importantly, you can even use the funding rate to formulate profit strategies.
This article will explain all the content in a simple and easy-to-understand way, please read patiently!
If you think the funding rate is just a 'fee' that needs to be paid or received periodically, then you may only understand half of the truth.
To put it directly, there are cases where people have been liquidated and lost all their funds due to ignoring the funding rate. Since there is a risk of being liquidated, it cannot simply be regarded as an ordinary transaction fee, right?
In fact, this is not a complicated concept. Through this article, we hope you can thoroughly understand the meaning of the funding rate, the calculation method, and the settlement times of various exchanges.
Table of Contents
What is the funding rate?
Calculation method of the funding rate
Settlement times of various exchanges
What is the funding rate?
Basically, there are two directional choices in contract trading
One is to go long (Long), betting on the price of the coin to rise; the other is to go short (Short), betting on the price of the coin to fall.
At this point, traders holding long or short positions need to pay a certain proportion of the amount to traders holding the opposite position, and this proportion is what we refer to as the 'funding rate'.
You might wonder: 'Why do I have to pay money?' I've already paid the trading fee, how come there's an additional fee?
The reason for the existence of the funding rate mechanism is to prevent the market from having excessively concentrated one-sided positions. Since contracts are perpetual, if too many traders maintain a position in one direction, it will disrupt market balance and even affect spot prices.
Therefore, the party with an excessively concentrated position must pay the funding rate to the other party.
For example:
1) Long position > Short position
→ Long direction pays the funding rate
→ Funding rate displayed as a positive value (+)
2) Long position < Short position
→ Short direction pays the funding rate
→ Funding rate displayed as a negative value (-)
You can remember it this way: Long → Market Bullish → Funding rate is positive
How to calculate the funding rate?
The calculation method of the funding rate is very simple
Funding Fee = Position Value × Funding Rate
Here, 'position value' is your investment amount × leverage multiple.
Let's look at an example
Assuming the investment amount is 1,000 USDT, leverage is 20 times, for a long position.
If the funding rate is +0.01%
1,000 × 20 × 0.01% = 2 USDT
→ Long needs to pay a funding fee of 2 USDT
If the funding rate is -0.02%
1,000 × 20 × 0.02% = 4 USDT
→ Longs will receive a funding fee of 4 USDT
Two points to note: the funding fee is multiplied by the leverage multiple.
As long as you hold a position, fees will be incurred at each settlement time point.
Therefore, even a funding rate at the decimal level can accumulate into significant gains or losses over time. Especially if you still hold a position at the settlement time, you must consider the funding fee factor.
Settlement times of funding rates for major exchanges
Taking the three most commonly used exchanges as examples: Binance, Bybit, Bitget
These three exchanges settle the funding rate every 8 hours, corresponding to the following Beijing time:
01:00 / 09:00 / 17:00
If you only hold a position for a short time, the funding fee may not have a significant impact.
But if you happen to hold a position around the settlement time, you must incorporate this into your trading strategy!
Today we have organized the concept and calculation method of 'Funding Rate' in Binance contract trading.
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I hope this article helps you make smarter decisions in the contract market!