The concept of financing interest occurs quite often in forward contracts. Today we look at what lies behind the term.
What are funding levels?
Financing rates are periodic payments. They are made on behalf of traders in long or short positions. They are due to differences between the prices of the perpetual futures markets and the spot markets. Depending on the type of open position, traders will either receive “financing” or have to pay a fee.
The degree of financing in the cryptocurrency market helps to counteract deviations in prices in both markets. The fees usually scale several times a day. The most common method of exchanging such a fee for an open position is charged every 8 hours. This is the case with Binance and BitMEX.
The degree of financing has two components: interest and bonus.
The interest rate is usually fixed – the platform indicates it as a percentage of the value of each item. Their values usually oscillate around a few tenths of a percent.
The premium is in turn a variable value. The value derives from the above-mentioned deviation between the price difference in the perpetual futures market and the spot price. To put it simply – a high spread between the markets increases the value of the premium, while a low premium indicates a relatively low spread between the two prices. Financing interest rates in periods of high price volatility can develop dynamically.
What does the payment process look like? When the fixed financing rate is positive, the forward price is higher than in the conventional market – then long traders pay short position.
As we wrote earlier, the fee is usually charged for changes every 8 hours. An interesting alternative, which is also the result of the withdrawal from the order book, is offered by Geco.one. In this case, the fee for the open position is charged only once every 24 hours.
How does this process affect traders?
Financing interest rates can have a huge impact on a trader’s final results. When using high indebtedness, an investor who pays the financing interest rate can suffer a loss, which can even lead to his position being liquidated (even though he is investing in a relatively stable market). On the other hand, fundraising can be profitable in markets with limited reach. Traders often monitor funding levels and include their mechanism in their investment strategies.
Most of all, however, financing interest rates are intended to encourage traders to take positions that hold futures contracts in the same price horizon as the spot markets.
