Funding Rate (Funding) - what it is and how to earn it

Funding is a commission paid by traders with open positions to eliminate discrepancies between the prices of an asset traded on the futures and spot markets.

Funding in trading is a financing mechanism that allows traders to use investors' capital to increase their trading operations. This model works on the principle of partnership: the trader manages the funds provided by investors and in return shares a portion of his profits with them. Funding provides traders with the opportunity to participate in larger trades than their own funds would allow, increasing the potential returns on successful trades. The interaction between investors and traders is usually regulated through specialized platforms that provide transparency of transactions and protection for the parties. The key is to choose reliable partners and clearly define the terms of cooperation, including profit sharing and risk management.

Funding is introduced by exchanges to ensure that there are no major discrepancies between the prices of an asset traded on the futures and spot market - to settle supply and demand between these markets.

Now let's dig a little deeper: there are two types of futures contracts - futures and open-ended. The peculiarity of futures contracts is that they have an expiration date: the open position will be closed automatically on the appointed date. Your position cannot affect the market equilibrium in any way, because until the contract closes, its value may differ from the current value of the underlying asset (what you see on the spot), but as you approach the end of the contract term, it approaches the real market price of the asset again.

Indefinite futures can be held for as long as you like - that's why they are indefinite. You must have noticed that the price of an asset on the futures markets differs from the spot price, and it can deviate in both directions by a certain number of points. In order to avoid serious price discrepancies on the markets, exchanges introduce the mechanism of funding into their work. Funding maintains a balance between markets, making them more attractive for trading.

Positive and Negative Funding

When the funding rate is positive, it means that the price of the futures contract is higher than the spot market price. In this case, the exchange charges a percentage to upside traders (Long) and passes it on to downside traders (Short). That is, those who hold long positions pay additional funds to short position holders.

In case of a negative funding rate, the price of the futures contract is lower than the spot market price. The Exchange charges interest on short positions and passes it on to holders of long positions.

Thus the exchange stimulates the holders of certain positions to close the current ones and change the direction of trade, as the work in the initial direction becomes less profitable.

Example of Funding Calculation

In general, the calculation of fundings takes place every 8 hours (at 4:00 (+15sec) 12:00 (+15sec) and 20:00 (+15sec) UTC). At the same time, some exchanges have a rule: in case of strong growth, the funding process can be carried out more frequently. At the moment of recalculation there is a redistribution of funds, when some traders are debited and others are credited. The size of the write-off varies and depends on open positions and quote divergence.

There is a formula by which funding is calculated: X = Y * Z. Where: X - amount of funding; Y - nominal value of positions; Z - funding rate.

It's important to remember that the formula for calculating fundings can vary from exchange to exchange.

Nominal value of items

To determine the face value of the assets, you need to multiply the marking price by the contract size.

The nominal value of positions is calculated according to the following formula: Y = A + B Where: Y - nominal value of positions; A - marking price; B - contract size.

The mark-to-market price is the fair value of the contract that is applied when liquidating a position or calculating unrealized gains and losses (PNL).

The contract size determines the number of reserved assets for a particular futures contract. For example, it can be 1 BTC, 10 ETH and so on, depending on the specific terms of the contract.

Funding rate

The funding rate in the futures market includes two components:

• Interest rate
• Premium (Premium Index).

Often the interest rate is fixed at 0.03% per day, which is 0.01% for every 8 hours.

The premium changes every 8 hours and plays a key role in managing prices between markets:

1. Between the value of the perpetual futures and the underlying asset.
2. Between the futures value and the marking price.

A high gap between these values leads to an increase in premium. On the other hand, a lower premium indicates a low gap between the values.

How is the premium index calculated?

The Premium Index is calculated for each contract by considering two factors:

1. A price index reflecting the average spot market rate on major exchanges.
2. Impact of Margin Nominal Number (IMN), which represents the nominal position size available for trading with a margin of 200 USDT.

How do you make money from fundraising?

Traders can make money on fund bets using the delta-neutrality strategy. The strategy is based on the difference between the price of the asset itself and derivatives. The essence of the strategy is to open and close positions at the right moment to obtain funding.

Use of Funding in Market Analysis

Watching the rate indicator when analyzing the market can help traders make money.

Positive rate:

If the rate recalculation will happen soon (in 5, 10, 30, 60 minutes), a trader who is going to open a long position should wait to avoid paying for financing for a short interval.

If a trader intends to open a short position, it is more profitable to do so at the end of the period in order to immediately receive the funding reward.

Negative bid:

For traders who want to open long positions, it is advisable to do so at the end of the period.

For short traders, positions opened at the beginning of the period are more preferable.

Funding rates show the general mood of the market: high positive rates indicate bullish strength, while negative rates indicate bearish strength.

If the funding rate is in the positive zone, the price of the contract exceeds the value of the asset on the spot, it is reasonable to consider opening a short position.

If the funding rate is in the negative zone, the contract price is below the market value on the spot market - it is profitable to consider opening a long position.

Funding and Arbitrage

Arbitrage is another interesting way to make money from fandering bets.

This strategy involves trading betting differences on multiple platforms simultaneously.

Example:

On one platform, BTC funding is 0.06%, while on the other - 0.03%. This can be used to make money: rates are paid every 8 hours, meaning that every 8 hours long positions will pay a funding fee to short positions on the first exchange, and vice versa on the second.

When you allocate $20000 for this type of earning, you can open two positions on different exchanges for $10000 each.

With a positive funding rate, a trader decides to open a short position on the first exchange for $10,000. Without leverage, his return for the day will be: ($ 10,000 x 0.06%) x 3 = $ 18. Remember that with leverage, this return will increase.

Hedging

First you will need to open two tabs - spot and futures market. To hedge his positions, a trader can open opposite positions in the two markets.

A trader buys BTC on the spot market and simultaneously sells a perpetual futures on it. Thus, he reaches a neutral position: if prices go up, the spot position is profitable, while the futures position is losing. If prices go down, the spot position becomes a loss, while the futures position becomes profitable. Thus one position compensates for the other.

Example:

You have $11100, buy $10000 worth of BTC on the spot, and sell $1100 worth of BTC with 10x leverage. The funding rate is 0.06% and remains at that level when it is recalculated.

Calculating profit:

• No leverage ($1,100 x 0.06%) x 3 = $1.98
• 10x leverage - $19.8.

Where to find fanding on popular exchanges

WhiteBIT Exchange: when you go to the futures terminal, you will see the inscription "Rate/Zworotnii vidlik" - here you will see the rate, as well as information about the amount of time until its recalculation.

At the same time, if you click on this inscription, you will be sent to a page where you will see the history of changing rates on this or that asset.

Binance Exchange: when you go to the futures markets on the Binance exchange, at the top of the terminal you can see the label "Bid/Stay." - This is where you can see the current bid and the amount of time until it is updated.

Here you can also find a tab-information panel where you can explore the current rates and their frequency by asset.

Kucoin exchange: going to derivatives trading you will also see the "Funding Rate" label at the top of the terminal.

OKX Exchange: when you switch to trading open-ended contracts, you will need to click on the three dots at the top of the terminal, after that you will see the current rate and the time until it is updated.

Funding is a rather effective tool for determining market sentiment, which in synchronization with other tools and chart analysis can help determine the future price movement with a higher probability.

How does it work? Explanation of the logic behind positive funding. Positive Funding means that the price of an asset in the spot market is lower than in the futures market. If the majority of trades on the market are now long, this means that there are many more potential sellers on the market, which can put pressure on the quotes, because closing a position up is selling, and closing a position down is buying.

Similarly, if a negative indicator dominates the Funding table, we can assume that there are more open short positions on the market than long positions = there are more potential buyers than sellers, because closing a short position is buying.

How to use fanding in trading? There are many variations of using fanding and each trader uses the tool in his own way. In different market situations, fanding can give different signals, which will be discussed below. Funding has three statuses:

• Neutral - 0.01 white color.
• Positive - greater than 0.01 red.
• Negative - less than 0.01 green color. The higher/lower the values, the brighter the color of the indicator.

In the Funding table we see the most liquid exchanges and all futures assets traded on them. For more efficient use of fanding, it is recommended to pay attention to all assets together - this method will more accurately signal the current state of the market. Also, it is important to take into account that fanding can be late and give false signals in the moment.

In the screenshot above we see an example when the market is more likely to be overbought. Since most of the values are neutral or positive - for us this is a signal that the market is likely to go down.

In this case, the Funding Table is glowing green, hinting at a potential upward move. But is everything so obvious and simple? Let's analyze this situation on the chart:

What we know. Price has been sideways for almost two weeks with negative fundings that hint at a possible upward move, but this is not a longing signal at current prices. At the bottom, we see liquidity piling up in the form of equal lows. Knowing that longing is a priority for us now, we need to find a trade entry. Seeing the liquidity accumulation at the bottom, we can expect a manipulative withdrawal of the liquidity pool to simplify the future true movement, after which we can expect a strong reaction, as we have an upward movement as our priority.

We see that the price first went down, taking out the internal liquidity, after which it reversed quite quickly, going up with full absorption of the entire downward movement.

Funding continued to be negative during and after the downward move, hinting at possible upside. Knowing that fundings had been negative for a long period of time and continued to be so during and after the downward move, which removed key domestic liquidity, it could be inferred that the main purpose of the downward move was to remove liquidity.

What to do if one asset is signaling a short, and all the other assets are signaling a long? We prioritize the big picture, but locally for intraday trading you can pay attention to your chosen assets without the general market condition. Do not forget that fundings can be late and change their values quite quickly.

Also, it is important to note that fanding can "unload" during sideways movement or low volatility in the markets, quickly leveling the overbought or oversold condition, so when using it, you need to constantly update the data.

Conclusion

Funding is a valid tool, but we cannot open trades based on it alone, as price can often continue to move against the indicators. Funding is an additional tool for analysis that works and can help a trader, but its use requires experience and the use of other types of analysis.

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