
Understand the intricacies of crypto funding rates and how they can affect trading strategies in 2023 — plus new rates for the Crypto.com Exchange.
Funding payment is a mechanism used in perpetual futures contracts to encourage the perpetual contract’s mark price to align with the underlying index’s price. When the funding rate is positive, long position holders pay funding to the short position holders. When the funding rate is negative, short position holders pay funding to the long position holders.
For more comprehensive information on funding payments, calculations, and settlement time, please visit our FAQ page.
Funding rates have one side of the trade pay a small fee to the other side. The specific mechanics of funding rates may vary across exchanges, but the general principle remains the same. Let’s consider a scenario where the price of perpetual futures contracts is trading above the spot price of the underlying asset.
In this case, the funding rate is adjusted to incentivise selling or closing long positions, where traders holding long positions on perpetual contracts have to pay a funding fee to traders holding short positions. The funding fee is generally a small percentage of the position size, calculated at regular intervals, such as every eight hours.
Conversely, if the price of perpetual contracts needs to be adjusted downward, the funding rate incentivises buying or closing short positions, where short position holders have to pay a funding fee to long position holders. By implementing funding rates in this manner, exchanges aim to narrow the gap between the price of perpetual contracts and the spot price of the asset.
Understanding funding rates provides valuable insight into trader sentiment and market dynamics. High funding rates often indicate a high interest in long trades on leverage, suggesting a bullish market sentiment. Conversely, low or negative funding rates suggest a crowded short position and a bearish market sentiment. By monitoring funding rates, traders can gauge the prevailing sentiment and potentially use this as a factor in identifying trading opportunities.
To effectively use funding rates as an indicator, it is essential to understand their relationship with market trends and price movements. While funding rates provide insights into sentiment, it is important to analyse them in conjunction with other indicators to validate trading decisions.
Below is a cheat sheet to help traders interpret funding rates:
It’s important to note that funding rates should not be the sole factor guiding trading decisions. While they can serve as a sentiment indicator, relying solely on funding rates may not yield consistent results. It is crucial to consider multiple factors — such as technical analysis, market trends, and fundamental indicators — before making trading decisions.
To promote funding rate magnitude, the Crypto.com Exchange launched a new funding rate mechanism in July 2023. The new calculation provides more meaningful funding rate magnitudes. While introduced by most crypto exchanges, Crypto.com’s funding rate publication versus payment schedule is unique: the mechanism provides predictability of the funding settlement rate while creating arbitrage incentives.
New Funding Rate | |
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Funding Rate Interval | Published every four hours✝ Funding Rate = Average Premium Rate |
Funding Settlement | Hourly settlement: At the end of each of the next four hours Funding Payment = Funding Rate / 4 * Position Value (USD) |
From 31 July 2023, 08:00 UTC, eligible users for trading derivatives will see the following indicators on the Trading page:
Assuming the session settlement time is 02:00 UTC, a trader with an open position on BTCUSD Perpetuals should interpret the funding indicators as follows:
The following Market Data Websocket Subscriptions are available for Crypto.com Exchange API users:
Please refer to the API documentation for full details.
Crypto funding rates play a vital role in maintaining the alignment between perpetual futures contracts and the price of the underlying asset. By incentivising specific trading behaviours, funding rates help direct the convergence of contract prices with the spot price.
Monitoring funding rates provides valuable insight into trader sentiment, but it’s crucial to consider multiple factors, perform thorough analysis, and employ a comprehensive trading strategy to achieve consistent results.
All examples listed in this article are for informational purposes only. You should not construe any such information or other material as legal, tax, investment, financial, cybersecurity, or other advice. Nothing contained herein shall constitute a solicitation, recommendation, endorsement, or offer by Crypto.com to invest, buy, or sell any coins, tokens, or other crypto assets. Returns on the buying and selling of crypto assets may be subject to tax, including capital gains tax, in your jurisdiction. Any descriptions of Crypto.com products or features are merely for illustrative purposes and do not constitute an endorsement, invitation, or solicitation.
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