Funding rate is a periodic payment to traders who have open positions in the perpetual futures market. They are calculated several times a day and help prevent long-term differences between the rates of the underlying asset and the derivative contract.
What is funding and how does it work?
Perpetual futures do not have an expiration date. Therefore, traders can hold positions indefinitely. And the contract value may deviate from the price of the underlying asset.
To minimize this deviation, the Binance Futures exchange has implemented a funding system. It automatically debits funds from some traders and credits them to others. This depends on open positions, as well as on the correlation of quotes on the futures and spot markets:
If the price of a perpetual futures contract is higher than the price of the underlying asset, then the funding is positive. In this case, the funding rate is charged to traders who are long and credited to traders who are short.
If the price of a perpetual futures contract is lower than the price of the underlying asset, then the funding is negative. The funding rate is then taken from the short traders and credited to the long traders.
Binance Futures exchange automatically calculates funding every 8 hours - at 00:00, 08:00 and 16:00 UTC. The rate is calculated (or charged) at the time of recalculation if the trader has an open position.
In the trading terminal you can view the current rate and the time until the next change (calculation).
The Binance exchange has a special information panel where the current frequency and funding rate for all pairs is displayed in real time.
In a special section you can view a graph of financing rates for 7 and 14 days.
How to calculate funding on the Binance exchange
Funding on the Binance exchange is calculated using a formula of three variables:
X = Y * Z.
Where:
X is the amount of financing;
Y is the nominal value of positions;
Z—financing rate.
Par value of positions
The nominal value of positions is calculated using the following formula:
Y = A + B
Where:
Y is the nominal value of positions;
A — marking price;
B is the contract size.
The mark price is the fair value of the contract that is used on liquidation (or in calculating unrealized PNL).
The contract size is the amount of assets that are reserved for the futures. For example, 1 BTC, 10 ETH, etc.
Financing rate
The futures financing rate consists of two components:
interest rate;
premium (premium-index).
The Binance platform has a fixed interest rate of 0.03% per day - 0.01% for each 8-hour interval. Also available on the exchange are contracts with a zero interest rate - BNB/USDT and BNB/BUSD.
Only the premium changes every 8 hours. And it serves as the main factor for reducing decorrelation:
between the cost of a perpetual futures and the underlying asset;
between the futures price and the mark price.
A high spread between these indicators leads to an increase in the premium. On the other hand, if the premium decreases, then the current spread is at a low level.
The premium index is calculated separately for each contract. In this case, two indicators are taken into account:
A price index that displays the average spot rate on major exchanges.
Impact Margin Nominal (IMN) is the nominal position size available for trading with a margin of 200 USDT (or 200 USD).
Detailed information on how to calculate the financing rate can be found in the help.
The history of changes in the premium index, price index and marking price can be viewed in the report.
In all cases, funding works on the principle of peer-to-peer payments. That is, amounts are transferred directly between user accounts, and the Binance exchange does not charge any commission for this.
Influence of crowd mood
Funding rates for perpetual futures depend on the overall trend in the spot market. And the driving force for funding is the value of the underlying asset, not the derivative contract.
This process occurs in the following sequence:
If Bitcoin confidently rises in price, then the BTC futures funding rate increases. This may indicate that most expect growth to continue.
But the higher the rate rises, the more money long traders will pay. This will gradually lead to a decrease in the spread between the quotes of the contract and the underlying asset.
As the futures price approaches the price of the underlying asset, the funding rate will decrease.
A similar sequence occurs in the opposite direction when there is a downward trend.
How to use funding in trading
Regardless of the strategy, it makes sense for traders to pay attention to the frequency of financing. Thanks to this, you can increase profits or reduce losses.
With a positive rate:
If there is little time left before recalculation (5, 10, 30, 60 minutes), and the trader wants to open a long position, then it is better for him to wait a little so as not to pay for funding for this short period.
If a trader wants to open a short position, then it is more profitable for him to do this at the end of the period in order to immediately receive the funding reward.
For a negative rate it works the other way around:
Long traders are better off opening positions at the end of the period.
Short traders are better off opening positions early in the period.
Funding rate arbitrage
Some traders use the funding rate arbitrage method. To do this, you need to open opposite positions on the futures and spot markets. As a result, they will offset each other’s profits and losses, but the user will be able to receive funding payments.
For example, a trader can buy BTC on the spot market and sell a perpetual futures contract on it. Thus he gets a neutral position:
If the chart goes up, then the spot position makes a profit, and the futures position makes a loss.
If the chart goes down, then the spot gives a loss, and the futures gives a profit.
As a result, the funding rate becomes the only source of profit and loss. The trader will make money on positive funding and lose on negative funding. If he can competently open and close such positions, then the profit will exceed the loss. This is financing rate arbitrage.
In the same way, you can combine positions with perpetual and deliverable futures.
Margin and Funding
Given that the funding rate is calculated on a margin basis, it can have a significant impact on an investor's profit or loss. For example, if a market participant uses high leverage in his strategy, his position may be liquidated when the funding is paid out. At the same time, if the outcome is successful, the trader can make a significant profit only through financing.
Taking into account such factors, it is possible to develop a trading strategy in which funding will be a large or main source of profit. And this applies even to trading pairs with low volatility.
Funding change notifications
Given the high volatility of the cryptocurrency market, traders need to quickly respond to changing situations. This also applies to financing rates. Therefore, the Binance exchange has the ability to configure notifications that will be automatically sent by email, SMS or mobile application.
