What's a "Funding Rate"
If you're new to perpetual futures trading, you might have noticed something called the funding rate within your Arcex app. While it might seem confusing at first, the funding rate is simple!
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If you're new to perpetual futures trading, you might have noticed something called the funding rate within your Arcex app. While it might seem confusing at first, the funding rate is simple!
The funding rate is a small periodic payment that is exchanged between traders holding long positions and traders holding short positions. This payment happens automatically every 8 hours on Arcex.
The purpose of the funding rate is to keep the price of the perpetual futures contract closely aligned with the actual spot price of the underlying asset (like Bitcoin or Ethereum). Without this mechanism, the perpetual futures price could drift far away from the real market price.
The direction of the funding payment depends on market sentiment:
When the funding rate is positive: Traders holding long positions pay traders holding short positions. This typically happens when the market is bullish and the perpetual futures price is trading above the spot price.
When the funding rate is negative: Traders holding short positions pay traders holding long positions. This typically happens when the market is bearish and the perpetual futures price is trading below the spot price.
Bullish (Futures > Spot)
Positive
Longs
Shorts
Bearish (Futures < Spot)
Negative
Shorts
Longs
The funding rate is usually a very small percentage, often just a fraction of a percent. On Arcex, the funding rate is calculated based on the difference between the perpetual futures price and the underlying spot price, along with a small interest rate component.
Example: If the funding rate is 0.01% and you have a $10,000 position, you would either pay or receive $1 during that funding period. As you can see, it's typically a small amount, but it can add up over time if you hold positions for extended periods.
On Arcex, funding payments are settled every 8 hours at the following times (UTC):
00:00 UTC
08:00 UTC
16:00 UTC
You only pay or receive funding if you have an open position at the exact moment the funding period occurs. If you close your position before the funding time, you won't be affected by that period's funding rate.
Understanding the funding rate is important for a few reasons:
Cost of Holding Positions: If you're planning to hold a position for a long time, you'll want to keep an eye on the funding rate. Consistently paying funding can eat into your profits, while consistently receiving funding can add to your gains.
Market Sentiment Indicator: The funding rate can give you a sense of market sentiment. A high positive funding rate suggests that most traders are bullish (going long), while a high negative funding rate suggests bearish sentiment (going short).
Strategy Considerations: Some advanced traders use funding rates as part of their strategy, taking positions that allow them to collect funding payments over time.
You can view the current and historical funding rates for each trading pair directly on the Arcex trading interface. This information is updated in real-time, so you always know what to expect.
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