Financing Rate | How We Use It In Speculative Trading | Nobody Tells Us 🤫
Do you see the#RAREfunding rate today? There are two things to notice. The first is -1.6661% and the other is the countdown that says 1 hour and 56 minutes to go. So what does having a negative funding rate like this mean? It refers to the price difference between the SPOT price and the FUTURES price.
When it is negative, it means that the price of FUTURES is lower than the price of SPOT. If it is positive, which is usually seen in a bull market with a positive funding rate, for example +2%, +3%, etc., it means that the price of FUTURES is far ahead of the SPOT PRS.
When you see a large funding ratio like -1.6661%, it indicates a large divergence between the SPOT market and the FUTURES market. As you can see in the second image, the spot price of#RAREis $0.2236, while the futures price is $0.2147. So the RARE futures price is about 3-5% lower than the spot market price. This means that people are encouraged to buy in the futures market until the futures market price catches up with the spot market price.
Now, what does this -1.6661% mean when this funding rate expires in 1 hour and 56 minutes? Think about it. If you were shorting $10,000 in the futures market when this funding rate expires, you would automatically be charged 1.6661%, or $166.61. The reason for this is that BINANCE doesn’t want you to go short. Instead, it encourages you to go long.
Now let's say you are in a $10,000 long position when the financing rate expires; you will actually get $166.61 back. The people in the short position will pay -1.6661% to the people in the long position.
Typically, what happens when there is this kind of huge spread in price is that the futures market ends up going up very quickly to match the spot market price. The reason is that nobody wants to lose 1.6661% when the funding rate expires. What typically happens when this funding rate expires is a huge sell-off because people in long positions take that 1.6661% profit and close out their long positions.
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