On the other hand, when the market is in a state of backwardation, meaning that the futures prices are lower than the spot price, the Funding Rate will be negative. In this scenario, traders holding long positions in perpetual futures contracts will pay Funding Fees to traders holding short positions. When the market is in a state of contango, meaning that the futures prices are higher than the spot price, the Funding Rate will be positive. The Funding Rate determines which traders pay or receive Funding Fees and what percentage of their positions is involved. It’s a mechanism used to maintain the balance between the prices of cryptocurrencies in the futures and spot markets. Note that the Funding Fees on Binance Futures are not a fee paid to Binance, but between traders. These notional amounts that a user pays or receives are known as Funding Fees. This exchange usually takes place every eight hours. The Funding Rate determines the periodic payments that are made between traders who hold either long or short positions in perpetual futures contracts during a Funding Round.įunding Round is the periodic event when the Funding Fee is exchanged between traders holding long and short positions. On Binance Futures, the mechanism that maintains a balance between futures and index prices in perpetual futures contracts is called Funding Rate. Without a proper mechanism to anchor the prices, the contract and spot prices may not align with each other. Unlike traditional futures contracts, perpetual futures contracts don’t have a set expiration date, which means traders can hold positions indefinitely. Upon expiration, the contract’s price and the underlying asset’s price align with each other, and all open positions are settled. Traditional futures contracts, also known as delivery futures, have a fixed expiration date - usually monthly or quarterly. Perpetual Futuresīinance Futures offers contracts that are derived from the price of cryptocurrencies traded in the spot market. In this article, we’ll talk about the fundamentals of the Funding Rates and the impact of its mechanism during periods of high volatility. High Funding Fees can affect a trader’s performance by reducing profits or increasing losses, which may lead to increased liquidation risk.īinance Futures implements the Funding Rate mechanism to ensure that the price of a perpetual futures contract aligns with the spot price of the underlying cryptocurrency to which the contract relates. Conversely, if the spot price is higher than the futures price, shorts pay Funding Fees to longs. ![]() If the price of a perpetual futures contract is higher than the spot price of the underlying asset at the time of a Funding Round, longs pay Funding Fees to shorts. These payments that traders pay or receive are known as Funding Fees. The Funding Rate determines the periodic payments that are made between traders who hold positions in perpetual futures contracts.
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