What is Funding Rate?
- New Guidance
Funding rates are periodic payments either to traders that are long or short based on the difference between perpetual contract markets and spot prices. Therefore, depending on open positions, traders will either pay or receive funding.
Crypto funding rates prevent lasting divergence in the price of both markets. It is recalculated several times a day - Huobi Futures does it every eight hours.
On our Huobi Futures platform, funding rates are displayed in real-time.
What determines the funding rate?
The funding that users should pay or receive is calculated as below:
Funding = Net Position * Contract Face Value * Settlement Price * Funding Rate
Among which, Net Position =Quantity of long positions (conts) – Quantity of short positions (conts)
When the funding rate is higher than 0, users with a net position higher than 0 have to pay funding, and users with a net position less than 0 will receive funding; when the funding rate is less than 0, users with a net position greater than 0 will receive funding, and users with a net position less than 0 have to pay funding.
Note: For a Perpetual that supports both cross and isolated margin modes, the funding for the cross margin account and the isolated margin account will be calculated separately.
How does it impact traders?
As funding calculations consider the amount of leverage used, funding rates may have a big impact on one’s profits and losses. With high leverage, a trader that pays for funding may suffer losses and get liquidated even in low volatility markets.
On the other hand, collecting funding can be very profitable, especially in range-bound markets.
Thus, traders can develop trading strategies to take advantage of funding rates and profit even in low-volatility markets.
Essentially, funding rates are designed to encourage traders to take positions that keep perpetual contract prices line in with spot markets.