Here’s why I think that way:
When a new coin is on the rise, you might see the funding rate charged every hour, not the usual 4 or 8 hours like with older coins such as bitcoin. This funding rate can spike to -2% or even higher, which is pretty significant. So, if someone shorts that coin, they’ll be racking up funding fees every hour while also losing money as the price goes up.
On the flip side, if the coin is crashing, the funding rate can turn negative again, sometimes hitting more than -2%, which is also a big deal. Shorts could be making money on the price drop, but those funding rates can eat into their gains.
So why does the funding rate go negative during volatile market swings when coins are jumping or falling? Like, if it’s negative during a pump, why isn’t it positive during a dump?
Typically, a positive funding rate happens when the market isn’t flipping out, but even then it’s rare, and it can still be negative. In both scenarios, the funding rate could be super low, like 0.01%.
One thing or sure you should undersis that both longing rate and shorting rate, both are funding one and the other, what make the difference in either it a negative funding rate rate let say -2% or a positive funding rate which could be +2%.
What determines that is the direction of the market at the current time.
Is very important to use average risk management when trading on whichever side or position.
You can have excellent risk management, but funding rate can be on another level. If you use $100 to trade from your $500 thatbyiu have on your trading account, but the funding rate is at -2 for those that short like you, they will be losing money as the market is going up, but also losing $2 or more every hour for the shit coins if the funding rate does not reduce. If the trader still leave the trade opened for 10 hours, that $20 alone in loss for funding fee which is too much, despite that they is losing.
Funding rate payments happen between long and short traders. The exchange may or may not take a fee, but I wouldnt say its a scam. The amount that you have to pay depends on the difference between the spot price and the price on the futures or perpetual market.
For certain assets, you can hedge against volatile rates if there is a market for it on Pendles Boros. Im not a skilled enough trader to know how it works yet, though it does seem like something which will have growing demand.
What I can add to funding rate is that it is used by experienced traders to know the price direction. For example, if the rate is positive, it could give an indication or sentiment that price is bullish and depending on the percentage of increase in the rate. This is likewise with negative funding rate which shows shorting or bearish price.
This is comparable with brokers fee in fiat currency trading that when market becomes positively volatile, brokers increase their fees to discourage traders from going in to make easier profit. And when the price is calm and ranging, the fees become normal.
It's not a scam because exchanges don't directly benefit from it anyway. It's the shorts paying the longs and vice versa. It is designed to ensure that the perpetual contract's price anchors to the spot price; otherwise, due to volatility, we might see a coin with a spot price that is at $2 while the contract's price is at $6. What would be the point of trading that contract then, and how will one be able to technically analyze it if there is a lot of deviation?
The huge refunding rate, say -2%, usually indicates that there is a huge price deviation from the spot price, and this is common with shitcoin contracts that have just been listed. Sometimes the funding rate hits the cap, which is -3% in some exchanges.
It is because on listing, a shitcoin usually pumps for a few hours and then begins the great dump. This is easy money to make when shorting, right? Well, 70% of other traders think the same, and there are fewer long positions, so this pushes the funding rate to astronomical values where shorts are forced to pay longs or avoid opening short positions because the funding doesn't look nice. It's an incentive for some people to go long instead of everybody shorting. Exchanges try to adjust the time from 8 hours to one hour so the price does not deviate that much.
To me I see funding rate as another opportunity for the exchange to make money the more on your trades, especially those that goes on perpetual or future trading, that is why before you choose a currency pair, you must Force understand the funding rate given on it before you trade so that you don't run into laws at the end of it even despite the market is on your direction, some traders do not pay attention to this and later wonder why they couldn't earn up to expectation.
From the way it looks I know this token and why you discussed about this hahah This token is $RAVE righ the pump and dump coin from the 5B+ marketcap to couple hundred million believe me friend I also short this coin and ending up losing more than 300 usd my all weeks sallary from the signature haha.
So it actually simple If a coin is pumping and the funding is -2% per hour, it means the market is incredibly 'over-shorted.' The exchange isn't taking that 2%; the 'Longs' are eating it as a reward for staying in a trade that everyone else is trying to bet against.
But im still didnt now the reason why some altcoin had 1 hour funding rate while the other is 8 hour
Not exactly scam but shady indeed, some exchange don't want to disclose how they calculate funding rate but the legit ones usually are reasonable. The reason you see high funding rate in volatile market specifically new ones because Open Interest spike in favour of one side whether it's long or short making the price diverge. I bet there were tons of people who learned how important it is to monitor funding rate from $RAVE lol and yeah it got people wrecked.
short hour is to attract liquidity into new market for those funding rate yield hunters who hedge across many exchanges and attract counter traders.
Mate, you simply don't know what you are taking about. No need to embarrass yourself.
This is why you avoid very volatile coins. Exchanges even try to warn you before you open a position and, of course, keep an eye on that funding rate and their funding history.
I explained it in the previous post. Some coins get so volatile and in a massive pump situation, a majority of traders will start to expect and dump and will therefore start shorting the coin. This will create way more selling pressure than that of even the spot market, making the futures price deviate much further from the spot price. To correct this, a funding rate is applied, but then the 8-hour period is a very long time, so they adjust it to 4 hours or even hourly if the funding rate keeps hitting the cap.
The problem here is that there is no transparency in most of the exchanges, especially the centralized exchanges, how every trader on their platform verify if these funding rates are accurate, I can also see that every exchange has different funding rates too.
I'm not really familiar in funding rates, but this is what I can observe.
I've had every reason to believe that funding rate is a SCAM. That thing is useless more than useless itself. Fine, the idea was okay, but I tell you, it has been hijacked by exchanges to their selfish gains. And these days, I pity anyone who follows what any company tells them as their modality, as their evil foot soldiers algorithms continue to perpetrate their evil silently.
How does funding rates benefit the exchanges?
Basically when the longs pay the shorts or the shots pay the longs, it is actually the money going from the longer's account to the shorter accounts and vice versa and none of that funding fee money is going in the exchange account. So the exchanges doesn't make money out of the funding fee, correct ?
I doubt funding rates are scams from any exchange you use to trade because they are meant to ensure price stability if you actually know how to use them to your advantage. Where it feels like a scam is if one lacks the proper knowledge and finds themselves on the losing side of a high leverage trading position.
A trader can use spot trading to guard against these funding rates or use quarterly or monthly futures to protect themselves, among other strategies that can be employed to stay safe when the issue of funding rate comes up.
I'm still wondering how people come up with the theory that exchanges benefit from the funding rates, especially of shitcoins... Like how if there is that lovely stable stream of trading fees that they can get without breaking much of a sweat?
You can literally see a live funding rate on a specific contract when you check up on the perpetual contract's page. It keeps changing with time depending on how people open positions before the funding time. What more transparency is needed that we don't know about?
Just like the trading volume or open interest, the funding rate will obviously be different for different exchanges. It's not universal.
Well could be considering funding rate is just balancing the price of the futures price because if there is a gap between them is you need to pay the extra funds for the funding rates, so before making futures you need to consider too the fees. Probably will be considered as hidden charges beside on the fees i guess. But if you manage to take profit with a high capital for sure you will just neglect this funding rate.
tbh, it's more about people not wisely choosing the exchange for their derivative trades. real reputable exchanges actually publish the formula for their funding rate, binance https://www.binance.com/en/support/faq/detail/360033525031 for example is publishing real formula that they use and the funding rate you paid become positive yield for people who countertrade your position to balance things out. So, to avoid getting scammed through shady funding rate calculation simply use reputable exchange.
Did you audit it? Many of you who don't follow an independent and regulator's practical cases will continue to be rubbed in the name of Theory of Operation.
I didn't say what I said to exonerate any exchanges, particularly Binance, all these exchanges are crooks, so you never can trust them. All these companies, so long as you are not part of them, you will only be stuck in their calculations and principles they want you to know, but the real evil job is being done internally. My entire mindset changed when I was making a personal research about the operations of brokers and exchanges. What I saw was shocking and evil when the search got to a level after 2 hours of curious searches.
With low volatility, we see small funding, and if volatility increases, then the size of the funding increases. Thus, when the price falls, there may be a situation where traders try to catch a price reversal and many long positions are opened, which leads to positive funding. But there may also be a situation where the price falls and traders open even more shorts, which in turn increases the negative funding even more.
I do not think this is something traders even pay attention to, like for example, all through the years I was serious as a trader, I never paid any real attention to the funding rate of any asset I decide to trade, and this is because once a position has been opened, all of this is no longer relevant, what is more relevant and important now is to do everything you can to exit or close that position in profit, whatever the exchange charges as fees whether hidden or not is no longer important.
And let me say that I think trading a newly listed crypto asset that is pumping in price and have lots traffic due to many traders trying to take a cut from the cake, this comes at extra fees, that is, traders will have to pay extra fees for trading assets in this type of position but this is something most don't even notice.
In the end, exchanges are like gambling casinos, there a business doing everything they can to stay in profit.