1.Function of Funding rate
The function of funding rate is to reduce the price difference (price regression) between perpetual contract market and spot market.
Unlike traditional contracts, perpetual contract traders can hold positions all the time without delivery dates or tracking different delivery months. For example, a trader can hold an short position permanently until it is closed. Therefore, perpetual contract trading is very similar to spot market trading. All in all, perpetual contracts will not be liquidated in the traditional way. Because of this, Coin8 creates a mechanism to ensure that the contract price is consistent with the index price, which is called funding rate.
2.What is the funding rate?
Funding rate is a fixed fee paid to long or short traders based on the difference between market price and spot price of perpetual contract. When the market trend is bullish, the funding rate is positive, and the long positions pay the funding fee to short positions. On the contrary, when the market is bearish, the funding rate is negative, and short positions pay the funding fee to long positions. Coin8 will not charge any fees for the fund rate, and the fund will be transferred directly between users.
On the Coin8 futures trading platform, the funding fee is calculated every 8 hours at UTC + 0 00:00 (GMT + 8 08:00) and UTC + 0:00 (GMT + 8 08:00) 08:00 (GMT+8 16: 00) and UTC + 0 16:00 (GMT+8 24:00) . Only if you hold a position at these time points will you be required to charge or pay a funding fee. If you hold a position in any direction at the time of calculation, you will be charged or paid the corresponding funding fee. When a trader does not have any position at that time, he will not be charged or paid any funding fee.
3.How to calculate the funding fee?
3.1 The formula for calculating the rate that you receive or pay is as follows:
Funding fee = position value × funding rate
The value of your position has nothing to do with leverage and is not determined by the amount of margin allocated to that position.
3.2 The formula for calculating the funding rate is as follows:
Funding rate = average premium index (P) + clamp{rate index (I)−average premium index (P), a, b}
Where the interest rate index I = 0.01%, the average premium index P is the simple average of the premium indices, and the premium index reflects the premium relationship between the futures price and the spot index price, with the specific formula as follows:
Premium index = [Max(0, impact bid price - price index ) - max(0, price index - impact ask price)] ÷ price index
The premium index is calculated every minute.
Impact bid and ask prices
Impact bid price = the average fill price to execute the Impact Margin Notional on the bid side.
Impact ask price = the average fill price to execute the Impact Margin Notional on the ask side.
Impact Margin Notional
Impact Margin Notional is the notion available to trade with 200 USDT worth of margin.
The specific formula is as follows:
Impact Margin Notional = 200 USDT ÷ minimum maintenance margin ratio
Impact Margin Notional for BTCUSDT = 200 USDT ÷ 0.5% = 40,000 USDT
4. Factors for calculating funding fees
Calculating funding fees involves multiple factors, such as futures prices and market supply and demand. It is calculated on a regular basis and then exchanged between long and short position holders.
It is important for traders to understand the characteristics and effects of funding fees:
1) Risk management: Consider how funding fee affects the cost of a position and develop sensible trading strategies.
2) Market analysis: Funding fees can be used as a reference to determine market trends and volatility.
3) Futures pairs selection: Choose the trading tool suited to your strategy based on the funding fees of different futures pairs.
However, funding fees are not entirely stable and are influenced by factors like market volatility and trading activity. Traders should closely monitor the market situation to adjust their trading strategies.
In conclusion, funding fee is an essential factor in trading. A deep understanding of its principles and effects is crucial for successful trading and investing.
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