How to calculate perpetual contract funding

The funding rate for a Bitcoin perpetual contract with a premium index of $20,150 and a mark price of $20,100 would be 0.025%, resulting in long positions paying funding fees of $50.25 for a 100-contract position.

Oct 21, 2024 at 07:35 pm

How to Calculate Perpetual Contract Funding

Perpetual contracts, also known as inverse futures contracts, are financial instruments that allow traders to speculate on the future price of an asset without an expiration date. Unlike traditional futures contracts, perpetual contracts have no set settlement date, meaning they can be held indefinitely or until the trader closes their position.

Funding Calculations

Perpetual contract funding is a mechanism used to ensure that the perpetual contract price remains closely aligned with the spot price of the underlying asset. Funding is calculated every eight hours (00:00, 08:00, 16:00 UTC) and is based on the difference between the perpetual contract price and the spot price of the underlying asset.

The funding rate is determined by the following formula:

Funding Rate = (Premium Index - Mark Price) / (Mark Price * 8)

Where:

• Premium Index is the average price of the perpetual contract over the past eight hours.
• Mark Price is the current price of the perpetual contract.

If the funding rate is positive, traders who are holding long positions (i.e., betting on a price increase) will pay funding fees to traders who are holding short positions (i.e., betting on a price decrease). Conversely, if the funding rate is negative, short positions will pay funding fees to long positions.

Example

Let's say the spot price of Bitcoin is $20,000 and the Mark Price of the Bitcoin perpetual contract is $20,100. The Premium Index is $20,150.

Funding Rate = (20,150 - 20,100) / (20,100 * 8)
Funding Rate = 0.00025 or 0.025%

In this example, the funding rate is positive, which means that long positions will pay funding fees to short positions. The funding fee for a trader with a long position of 100 Bitcoin contracts would be:

Funding Fee = 0.00025 * 100 * 100 * 20,100
Funding Fee = $50.25

Factors Affecting Funding Rate

• Contango vs. Backwardation: When the perpetual contract price is above (contango) or below (backwardation) the spot price, the funding rate will be positive or negative, respectively.
• Market Sentiment: In general, funding rates tend to be higher when there is a high level of market volatility or when the market is strongly trending in one direction.
• Open Interest: The total amount of open interest in a perpetual contract can also affect the funding rate. Higher open interest typically leads to higher funding rates.

Conclusion

Perpetual contract funding is an important mechanism that helps to maintain the convergence of the perpetual contract price with the spot price of the underlying asset. Traders should be aware of the factors that can affect funding rates and consider these factors when making trading decisions.