Understanding trade fees, funding rates, and breakeven with the Dcrypt Terminal
BitMEX’s perpetual swap has very quickly cemented itself as the go to tool for day traders speculating on Bitcoin price moves. The XBT/USD contract has been adopted worldwide and boasts daily volumes of anywhere from $2-$6 billion. To put that in perspective, the CME’s all time high is just below $600 million on a single day.
The beauty of the perpetual swap is that it packages a very complex financial product into a very enticing instrument for retail traders. There is no expiration date, traders can use high amounts of leverage, counterparty risk isn’t an issue, and traders are rewarded for taking contrarian sides of a trade. In order to successfully trade perpetual swaps, it is imperative that traders understand the nuances of the contract that allow it to behave the way it does.
Funding Rate
The funding rate is used to keep the price of the perpetual swap contract in line with the underlying asset. This is meant to mimic how margin-trading works in traditional markets, where buyers and sellers exchange interest payments periodically. Every 8 hours, if you are holding an open position, you will either pay or receive funding. A negative funding rate means that shorts pay longs, and a positive funding rate means longs pay shorts.
In the example above we can see the funding rate is a negative .0953%. This means that traders who go short will need to pay that amount on the notional value of their position. On the other side, if you were to be long this contract you would receive the funding rate based on your notional. When using leverage, this funding rate can very quickly eat into your available balance and actually cause you to be liquidated without the price moving against you.
Trading Fees
Simply put, trading fees are the cost required to participate. There are two types of fees: maker, and taker. A maker order is one that does not execute immediately and sits on the order book until it is matched by another party (creating liquidity). A taker order is one that crosses the book and executes immediately (taking liquidity). All maker fees on BitMEX are negative meaning that the trader will receive a rebate (you can view a full breakdown of the BitMEX fees here: https://www.bitmex.com/app/fees). Fees are always calculated off of your notional trade value. This is important when trading with leverage because if you trade 100x on a large order, your breakeven price will be very far from strike.
Putting it all together: Breakeven Price
Breakeven price is the price at which a trader needs to exit a position in order to make money. Breakeven price takes into account the following factors: funding rate, leverage, and trading fees.
In the example above I enter the market short 100 contracts @ $3706.5. My notional value is .02698 (100/3706.5) and my breakeven is .02700 (100/3703.5). The difference being the funding fee that I needed to pay to enter this position. Once I have crossed that breakeven barrier I have a profitable trade (based solely on the fee breakeven).
Fees and Breakeven
When using high leverage, the fee you pay on executing a trade can be a large portion of your upfront capital. This immediate cost to your PnL requires that the asset trade further away from entry to profit from the position. If I were to go 100x on 10000 contracts of XBT/USD I would need to put down 115 USD worth of deposit. If placing a taker order, my fee incurred would be $15 USD (13% of initial margin). For this trade to be profitable, the contract needs to trade far enough in my favor that I net out the $15 taker fee.
Funding Rate and Breakeven
For markets with reduced volatility, collecting the funding rate can be very profitable. Traders can size up their positions, add leverage and collect the funding rate over time. On the flip side, traders looking for large price movements paying the funding rate have to incur a nasty expense every 8 hours. In low volatility environments, it often pays to be contrarian. Take a look below to see why betting with the market can be costly.
Every 8 hour funding rate period changes your breakeven cost. Say I’m long 10,000 contracts @$3703.5 with a funding rate of .35%. I would incur a 9m SAT loss, or $35, every 8 hours. Considering the high leverage allowed on BitMEX, I could enter this trade with an initial margin of only $115. Considering a position that equates to 50% of your available balance, the contract would need to move very quickly to make up each loss point. The trader here would only have 3 funding rate periods before his position was reduced to account for the fee. If the trader was to close out right before the last possible funding rate they would need the contract to yield a 100% gain to break even! This is why even though high leverage is nice, it is often a dangerous game.
Dcrypt and Breakeven
To account for the nuances of trading with high leverage on BitMEX, Dcrypt has created break even calculators to help manage open positions. These will run to analyze current open positions, potential costs to be incurred during funding intervals, and the expected loss of a position vs the gain of contract. These tools will help crypto traders understand their risk and will lead to more profitable trading in the future.
If you have any questions or would like to see something added to Dcrypt please do not hesitate to reach out at Jack.Trunz@dcrypt.io
Dcrypt is an investment platform for the cryptocurrency markets providing BitMEX traders with advanced analytics and execution tools. If you’re interested in trying it out, you can sign up for a free 30 day trial here: https://dcrypt.io/register
