How to calculate Poloniex contract rates

To calculate Poloniex contract rates, determine the mark price from spot exchange averages, adjust for the funding rate (positive for higher contract rate, negative for lower), and consider any premium or discount based on market dynamics.

Dec 06, 2024 at 08:01 pm

How to Calculate Poloniex Contract Rates: A Comprehensive Guide

Introduction

Poloniex, a renowned cryptocurrency exchange, offers robust trading capabilities, including contract trading. Contracts or futures are derivatives that allow traders to capitalize on price speculations and potentially amplify returns. However, understanding the intricacies of contract rate calculation is crucial for effective trading. This comprehensive guide will elucidate the steps involved in calculating Poloniex contract rates, ensuring traders are well-equipped to navigate the complex derivatives market.

Understanding Contract Basics

• Perpetual contracts, also known as inverse perpetual futures, are leveraged financial instruments that mimic the price of an underlying cryptocurrency. Their lifespan is indefinite, allowing traders to hold positions indefinitely.
• Unlike standard futures contracts, perpetual contracts do not have an expiry date. Instead, traders pay or receive funding fees at preset intervals based on their position relative to the market.

Poloniex Contract Rates

Poloniex contract rates are indicative of the current market price of the underlying cryptocurrency. These rates form the basis for all trading activities, including order placement, execution, and settlement.

Steps to Calculate Poloniex Contract Rates

1. Determine the Mark Price

• The mark price is a crucial reference point that represents the fair market value of the underlying cryptocurrency. It is calculated by taking the average of multiple reputable exchanges' spot prices.
• Poloniex uses the aggregated spot prices from Binance, Coinbase Pro, Kraken, and Huobi to calculate the mark price.
• The mark price is dynamic and fluctuates based on changes in the underlying asset's spot prices across these exchanges.

2. Calculate the Funding Rate

• The funding rate, also known as the financing rate, represents the difference between the perpetual contract price and the mark price.
• A positive funding rate indicates that demand for the contract is high relative to the spot market. Traders in long positions pay the short positions, incentivizing them to maintain the contract price in line with the spot market.
• Conversely, a negative funding rate suggests a higher demand for short positions, causing long positions to pay short positions to align the contract price with the mark price.

3. Adjust for Funding

• To determine the actual contract rate, the current mark price must be adjusted for the prevailing funding rate.
• If the funding rate is positive, the current contract rate will be higher than the mark price. Conversely, if the funding rate is negative, the contract rate will be lower than the mark price.

4. Consider Premium/Discount

• In addition to the funding rate adjustment, the contract rate may also incorporate a premium or discount.
• A premium exists when the contract rate is higher than the mark price, and a discount occurs when it is lower. These premiums or discounts arise from market supply and demand dynamics.
• Premiums are typically seen in bull markets when traders expect the underlying asset's price to rise further. Discounts, on the other hand, are more prevalent in bear markets when traders anticipate a price decline.

Example

To illustrate the process, let's assume the following scenario:

• Mark Price: $10,000
• Funding Rate: 0.01% (positive)
• Premium: 0.5%

Calculation:

• Adjusted Contract Rate = Mark Price + (Funding Rate x Mark Price) + Premium
• Adjusted Contract Rate = $10,000 + (0.01% x $10,000) + 0.5%
• Adjusted Contract Rate = $10,010

The adjusted contract rate becomes $10,010, reflecting a premium of 0.5% over the mark price.