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What is the funding rate | best and easy way to calculate the funding rate - YouTube
Channel: Cryptos Monopoly
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After every 8 hours, the broker charges the
trader a small amount of fee that is deducted
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from his account balance.
And that fee is called the funding fee.
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Hey guys, welcome to cryptos monopoly, my
name is Daksh, and in this video, I will tell
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you what is funding rate, how to calculate
it and in the end, I am going to tell you
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how funding rate can affect your trading account
so make sure you watch this video till the
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end.
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So, what is the funding rate?
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There are two different types of the futures
contract.
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The traditional futures contract and the perpetual
futures contract.
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The main difference between both is that a
traditional futures contract has an expiration
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time.
That means if a trader holds a position until
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the expiration time his position will be forcefully
closed and the outcome of the trade will be
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settled.
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Normally people trade on traditional future
contracts but in cryptocurrencies, we trade
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on a perpetual futures contract.
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In a perpetual futures contract, there is
no expiry date, which means if you open a
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trade on bitcoin today, you can hold it as
long as you want until your account liquidates.
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For this to happen the broker has to maintain(converge)
the difference between the spot rate and the
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futures rate.
And so a funding fee is charged from or paid
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to a trader with an open position.
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By the way, if you have no idea about the
perpetual and traditional future i am gonna
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add a video on it up next.
So, make sure you subscribe to this channel.
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Now,
If you see the Binance trading platform, you
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will notice that the funding rate is displayed
along with a timer beside it.
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That time tells us after how many hours or
minutes the funding rate will be charged.
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So, if a funding rate is charged whom does
it goes to?
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And what determines it?
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Unlike forex and stockbrokers here in cryptocurrencies,
the funding rate is peer to peer.
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That means it does not go to the broker and
is directly exchanged between the buyers and
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sellers.
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That is when the funding rate is positive
the traders who are long pay for short positions.
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Conversely, a negative funding rate indicates
that short positions pay for longs.
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In perpetual futures trading, the funding
rate consists of the interest rate and the
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premium rate.
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The interest rate is mostly fixed with all
the brokers.
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But the premium rate changes as per the volatility
in the market, and the difference between
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the spot price and futures price.
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Now let us see how to calculate, how much
amount will you get charged with.
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The amount you will be charged depends upon
your position size.
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For example, let us say you bought 1 bitcoin
at a price of $10000 and the funding rate
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was 0.015%.
In this case, you will be charged $1 and 50
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cents.
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Again if you bought 5 bitcoin at a price of
$10000 and the funding rate was 0.015%.
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In this case, you will be charged $7 and 50
cents.
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As 5X10000= $50000
And 0.015% of $50000 is $7 and 50 cents.
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You can clearly see that as your position
size increases the amount you are charged
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with increases as well.
Therefore it is very critical for a trader
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to understand how funding rates can greatly
affect the trading account.
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As funding calculations consider the amount
of leverage used, funding rates may have a
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big impact on one鈥檚 profits and losses.
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For someone with high leverage, a trader that
pays for funding may suffer losses and get
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liquidated even in low volatility markets.
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Whenever a trader with high leverage enters
a position he doesn't pay much attention to
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the funding rate he will be charged with and
calculates a position size without including
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the funding rate.
The problem with this is many times when the
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funding rate is high, high amounts get deducted
from the account which the trader fails to
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notice, and as a result of this, the liquidation
price of the trade narrows, and there is a
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high chance of liquidation of the account.
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Sometimes the funding rate also appears to
be a blessing.
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When a trader is paid with a funding rate
and if the trader is using higher leverage
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he can get profited with that funding rate
without even actually winning trade with a
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high margin.
And many traders use a strategy for this and
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