Crypto Futures For Beginners; What Is Funding Rate And How To Profit From It (2024)

FAQs

Crypto Futures For Beginners; What Is Funding Rate And How To Profit From It? ›

The funding rate is a periodic payment exchanged between buyers and sellers in perpetual futures

In scenarios where the funding rate is positive, a trader can generate stable funding fee income by purchasing on the spot market and short selling an equivalent position in perpetual contracts – this type of arbitrage is often referred to as positive arbitrage.

Crypto Futures trading revolves around the concept of prediction and strategy. By agreeing to buy (long) or sell (short) a Cryptocurrency at a future price, traders can hedge against potential losses or leverage for greater gains based on their market predictions of the underlying asset.

Funding rate: To keep the price of perpetual futures close to the underlying asset's spot price, a mechanism called the funding rate is used. This rate is paid by one side of the contract to the other, depending on the difference between the perpetual futures price and the spot price.

How to calculate your crypto profit. To calculate your crypto gains and losses, apply this simple formula: Profit or Loss = Sale Price - Purchase Price.

The funding rate reflects overall market sentiment. A high positive rate signals bullish sentiment, with traders willing to pay more to maintain long positions. On the other hand, a high negative rate indicates bearish sentiment, showing a preference for short selling.

The funding rate ensures that the funding mechanism aligns the futures market price with the index price. When the funding rate is positive, users who have long positions pay a funding fee to users who have short positions.

Example. Trader A holds a long position of 10 BTC contracts and the Mark Price is 8,000 USDT at the funding timestamp with the current funding rate at 0.01%. As the funding rate is positive (0.01%), the long position holders have to pay the short position holders.

Use Perpetual Swaps: Some exchanges offer perpetual swap contracts without funding fees. These contracts often have a synthetic rate that mimics the funding rate but does not involve actual transfers between traders. Consider using these contracts if you want to avoid funding fees.

Example Calculation: Let's say the perpetual futures contract for a crypto is trading at a 0.1% premium compared to the spot market. If the funding rate for the funding interval is 0.01%, the funding fee paid by long positions to short positions can be calculated as follows: Funding Fee = Premium * Funding Rate.

How to calculate futures profit? ›

Calculating profit and loss on a trade is done by multiplying the dollar value of a one-tick move by the number of ticks the futures contract has moved since you purchased the contract.

Overview: Crypto Day Trading

The objective of crypto day trading is to make profits from small price movements in the crypto market by buying at low and selling at high or short-selling high and then covering at lower prices.

Long and short trading: If you predict that the funding fee will be positive, you can go long on the contract and simultaneously go short an equal value contract. When the funding fee occurs, you will receive the funding fee from the long contract and pay the same amount of funding fee to the short contract.

In summary, funding rate arbitrage can provide stable income, but it carries risks. In extreme situations, when prices spike in either direction, there is a risk of liquidation for the other side of the position.

Funding Rate Farming: The Basics

By simultaneously taking opposite positions on Clone and a perpetual exchange like Drift, traders can profit from funding rates while minimizing market exposure, all within Solana DeFi.

Positive funding occurs when the funding rate for a perpetual futures contract or a margin trade is positive. This means that traders who are holding positions that are aligned with the prevailing market trend are required to pay a fee to the traders who hold positions that are opposite to the trend.