Introduction
- This guide unpacks the concept of funding rates in SorooshX futures trading and walks you through how they’re calculated.
- It also highlights how funding rates differ from standard transaction fees.
-Importantly, funding rates are exchanged between traders, not collected by SorooshX.
In the world of cryptocurrency futures—especially perpetual contracts—funding rates are a key tool used by exchanges to keep futures prices aligned with spot market prices. They act as a financial bridge between traders holding long and short positions. While SorooshX adjusts account balances to reflect these fees, it doesn’t keep the funds; they’re directly passed between traders. Funding rates play a pivotal role in maintaining a fair and balanced market, preventing extreme price disparities between futures and the underlying assets.
The funding rate arises from the gap between perpetual futures prices and the spot market value. Essentially, it’s a periodic payment exchanged between traders with opposing positions. In a strong bullish market, the funding rate usually turns positive, meaning long position holders pay short traders. When the market trends downward, the funding rate dips into negative territory, and short sellers compensate long traders.
Notably, SorooshX doesn’t impose this fee—it’s a mechanism between market participants to keep prices anchored to the real market. Whether you pay or receive funding depends on the direction and sign (positive or negative) of the rate.
For example, in bullish conditions with a positive funding rate, long traders make payments to shorts. If the market flips bearish, the reverse happens, and short traders pay longs. These rates are recalculated every eight hours, at 8:00 AM, 4:00 PM, and 00:00 (midnight) (UTC). So, if you’re holding a position during these checkpoints, you may either owe or earn a funding fee.
Keep in mind, transactions just before these timestamps may still be subject to funding, so timing your trades is crucial. For example, opening or closing a position at 7:00:05 AM could still include the upcoming funding charge.
When charged, the funding fee is deducted from the user’s available margin, but only up to the maintenance margin threshold. Any extra margin remains untouched. The actual amount one receives from funding depends on how much is collected from the opposing side. Additionally, some traders using high leverage might be exempt from certain funding costs, depending on their margin setup.
It’s important to remember that funding rates are entirely separate from transaction fees, which are paid to the exchange when executing trades.
Although different exchanges may have slight variations, the general formula remains consistent. SorooshX calculates the funding rate like this:
Funding rate = average premium index (P) + clamp {interest rate (I) − average premium index (P), a, b}
Here’s a breakdown:
- I (interest rate index) is set at 0.01%.
- The average premium index (P) represents the average gap between futures and spot prices, calculated as:
Premium index = [max(0, impact bid price − price index) − max(0, price index − impact ask price)] ÷ price index
This figure updates every minute.
- Impact bid price and impact ask price are determined by the average fill price required to execute trades using the “Impact Margin Notional” on each side.
- Impact Margin Notional refers to the notional value of a trade backed by 200 USDT of margin, calculated as:
200 USDT ÷ minimum maintenance margin ratio
Though the formula may seem intricate, the essence is straightforward: it reflects the balance of power between long and short positions. As a trader, your main focus should be on understanding the funding fee due at each funding checkpoint.
The funding fee itself is calculated as:
Funding fee = position value × funding rate
Where:
Position value = mark price at time of funding × contract size
For instance, if Trader A holds a 10 BTC long position in BTC/USDT perpetual futures with a mark price of 70,000 USDT and the funding rate is 0.01%:
Position value = 70,000 × 10 = 700,000 USDT
Funding fee = 700,000 × 0.01% = 70 USDT
Since the funding rate is positive, Trader A (long) pays 70 USDT to Trader B (short). If Trader A closes the position before the funding window, no fee is applied.
Funding fees fluctuate with market conditions, including volatility and trading volumes. Keeping an eye on these variables can help traders refine their strategies.
In short, funding rates are a cornerstone of the perpetual futures market, helping tether contract prices to the spot market and encouraging a stable, liquid trading environment. Anyone stepping into Bitcoin or crypto futures should grasp how these fees work and factor them into their trading approach. As with any trading venture, thoughtful strategy and solid risk management are the keys to long-term success.