The Funding mechanism and Funding Rate are the important features for Perpetual Contracts that insure the Last Traded Price on the crypto exchange does not deviate much from the Index Price.
Funding: The periodic interest payments between traders which aim to keep the Last Traded Price as close to the Index Price as possible.
Funding is used to make sure the Last Traded Price doesn't deviate significantly from the BTC/USD Index Price.
The Funding Rate is comprised of two main parts: the Interest Rate and the Premium/Discount. This rate aims to keep the Last Traded Price of the Perpetual Contract aligned with the underlying market price of Bitcoin.
Every Perpetual Contract traded on BTCMEX consists of Base Currency (BTC) and Quote Currency (USD).
Funding Timestamps: UTC 04:00 (Beijing 12:00), UTC 12:00 (Beijing 20:00), and UTC 20:00 (Beijing 04:00).
The Interest Rate calculation:
Interest Rate (I) = (Interest Quote Index - Interest Base Index) / Funding Interval, where Interest Base Index = The Interest Rate for borrowing the Base currency;
Interest Quote Index = The Interest Rate for borrowing the Quote currency;
Funding Interval = 3 (Funding occurs every 8 hours).
Funding Rate calculation:
BTCMEX calculates the Premium Index (P) and Interest Rate (I) every minute and then performs an 8-Hour Time-Weighted-Average-Price (TWAP).
The Funding Rate is next calculated with the 8-Hour Interest Rate Component and the 8-Hour Premium/Discount Component. A +/-0.05% dampener is added.
Funding Rate (F) = Premium Index (P) + clamp (Interest Rate (I) - Premium Index (P), 0.05%, - 0.05%)
Hence, if (I - P) is within +/-0.05% then F = P + (I - P) = I.
In other words, the Funding Rate will equal the Interest Rate.
This calculated Funding Rate is then applied to a trader’s BTC Position Value to determine the Funding Amount to be paid or received at the Funding Timestamp.
Funding Rate Caps
BTCMEX imposes caps on the Funding Rate to ensure the maximum Leverage can still be utilized. To do this, two caps are imposed:
- The absolute Funding Rate is capped at 75% of the Initial Margin Rate - Maintenance Margin Rate.
- If the Initial Margin Rate is 1% Rate and the Maintenance Margin Rate is 0.5%, the maximum Funding Rate will be 75% * (1% - 0.5%) = 0.375%.
The Funding Rate may not change by more than 75% of the Maintenance Margin Rate between Funding Intervals.
BTCMEX does not charge any fees on Funding. It is a direct peer-to-peer interest payment. Funding is added to or taken from the trader's Initial Margin.
The information about Funding is available in the Contract Details in the left bottom corner on BTCMEX.
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