In the past three days, have many fans who opened short positions felt the pain from the high funding rates of this dog fund, FUN? This situation is not unique to this cryptocurrency; many small altcoins that surged in spot trading often see high funding rates of -2% or even -3% after a round of explosive growth. It's not just new players who find it confusing; even many experienced players don't understand the reasons behind it. Here, I will explain the definition of funding rates for all cryptocurrency enthusiasts. Why do perpetual contracts have this mechanism? What are its calculation methods and functions? This mechanism only comes into play when there is a significant price difference between spot and contracts. If you want to trade small altcoins with contracts, you must understand the intricacies involved, which will help us lose less money and increase the likelihood of hitting the peak!

Definition

The funding rate is a mechanism used to balance the forces of long and short positions in the perpetual contract market. It reflects the cost differences of positions held by both sides at the current market price and is a fee that the contract holders must pay or receive at regular intervals (such as every 8 hours).

Calculation Method

The funding rate consists of two components: the interest rate and the premium index. The calculation formula is generally: funding rate = interest rate + premium index. Here, the interest rate is a relatively stable base rate, while the premium index changes dynamically based on the comparison of market long and short forces and the relationship between contract prices and spot prices.

Function

- Balancing long and short positions: When the funding rate is positive, it indicates that the cost of long positions is higher, and short positions will receive funding compensation, attracting more investors to short, thus balancing the market forces; conversely, when the funding rate is negative, longs will receive compensation, attracting more people to go long.

- Reflecting market sentiment: Changes in the funding rate can reflect the market's expectations for future price movements. If the funding rate remains persistently positive and high, it may indicate strong bullish sentiment, with longs willing to pay higher fees to maintain their positions; conversely, if it remains negative for a prolonged period, it may suggest strong bearish sentiment in the market.

- Preventing excessive price deviation: Through the transfer of funds between long and short positions, it encourages contract prices to stay close to spot prices, avoiding excessive price differences between contract prices and spot prices due to market speculation, thus maintaining market stability and reasonable pricing.

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