FUNDING RATE EXPLAINED

When you have open derivatives trades, you see lots of tiny fees under your trades, then you wonder how many fees do i got to pay for one trade? Well you’re only paying one but it’s broken down to tiny bits because of Funding rates. Let’s dive in 👇

What is Funding rate?

Funding Fates are periodic payments either to traders that are long or short based on the difference between perpetual contract markets and spot prices. Therefore, depending on open positions, traders will either pay or receive funding.

All cryptocurrency derivatives exchanges use funding rates for perpetual contracts and the standard unit is a percentage.

Crypto funding rates ensure that there is no long-term divergence in the price of both markets by making sure it is recalculated numerous times a day.

Funding rates represent traders' sentiments in the perpetual swaps market and the amount is proportional to the number of contracts.

Rates over ‘0’ (Positive rates): Dominant Long Sentiment

Positive funding rates indicate that long position traders are dominant and are willing to pay funding to short traders. Positive funding rates imply that many traders are bullish.

Rates under ‘0’ (Negative rates): Dominant Short Sentiment

Negative funding rates indicate that short position traders are dominant and are willing to pay long traders. Negative funding rates imply that many traders are bearish.

Increasing trend: Longs are gaining dominance

Decreasing trend: Shorts are gaining dominance

So when you’re in a long trade and the market is shorting, you will be paying the shorters funding rate, and vice versa. The longer you’re in the trade, the more you either pay or receive because funding rates is calculated multiple times a day.

Funding rate helps you establish whether a market is saturated with buyers or sellers. Therefore, using only this tool to make decisions on operating an asset could lead to erroneous predictions.

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