So, people keep saying that the funding rate is what keeps the perpetual market prices of bitcoin and other cryptos in line with the spot market prices.
But here’s the thing: the futures market doesn’t have a funding rate, yet folks are still trading there, and it's a solid market too.
Clearly, the futures and perpetual markets aren’t the same. Traders get what I mean.
So if the futures market can operate without a funding rate, why do we even have one in the perpetual market?
I know funding rates, but this is new to me: that the future does not have funding rates. But why, when going to the futures tab, are all coins perpetuals?
We're learning. I looked into it and discovered that some future pairs with date expirations do not have funding rates because they do not fall under perpetual.
In perpetual you can hold as long as you like with no expiration, but the price in the future does not correlate on the spot. That is why funding rates exist.
Based on what I understand, if the bias is bullish and you take a long position on the perp, you'll pay shorts with the funding rates every 8 hours, but if you go with shorts while it's bullish, you'll earn from funding rates every 8 hours.
Since the question is why futures do not have funding rates compared to perpetuals, I believe it is because futures, or pairs with expiration dates, correlate much to spot prices.
To be honest, when I trade futures, I don't care much about funding rates because I only get very small fees or earn money from them, but I've heard that some traders take advantage of this. Traders who engage in arbitrage typically take advantage of these opportunities by trading on multiple exchanges.
They did this by buying or selling on the spot while going long or short on a perpetual basis in order to profit from funding rates.
Now I understand how arbitrage is not only making money from buying cheaper on one exchange and selling it higher on the other exchange; they also take advantage of these funding rates.
The future market price is different from spot market price. On the exchanges that I have used, future market price is more deviate from the spot market price than perpetual market price, but still it moves appropriately the way it should move just like how it is in the perpetual market.
Example is a new coin that is increasing in price, it will have negative funding rates. I have seen the ones that has over -2% funding rates. As some traders see it, they will open long position and if the coin continue to increase, they will make 2% of the money they use to open the position and the money used to open the position increased more as the coin rises. This happened to the coin called RaveDAO recently before it was dumped and the funding rate was charged every 1 hour. I have noticed this on many other coins.
Here you need to pay attention to the most important difference between futures and perpetual ones: the latter do not have a contract expiration date. Futures have no effect on the spot market, and in order to ensure that the price of perpetual contracts does not differ significantly from the price of the spot market, funding has been established, in which if the price is lower than the spot price, it will be negative, if higher, then positive.
Because perpetual dont have expiration date and you can hold the position endlessly unless liquidated so there needs to be a mechanism to keep the price close to the spot price so they invented funding rate.
So, in the special case of future market the price will eventually converge when the contract is settled making funding rate pointless but its different on perpetual, imagine if everyone don't want to close their position, the price will go astray.
That's exactly how arbitrage traders make money with less risk; they both use perp and spot, but you rarely see this 2% in Bitcoin or any coins with a huge market cap.
The most common I've seen is 0.010% or less, but new listed coins can easily achieve that depending on the price gap between spot and perpetual and the majority(short or long).
The good thing about what you noticed is they pay every hour. Honestly, I've never tried this before, but it looks like a good opportunity if you have a good amount of capital. The 2% every hour is the advantage if the price keeps rising or falling in a day; with 2% every hour, it's around 48% in a day, which is a huge profit even if you are losing in spot holding that coin or token while your perp is making profit not only from the price itself but also from funding fees.
So I don't see much risk here because you're buying on the spot and shorting on perp, but I believe that high funding rates only occur for new coins with large spikes, such as newly listed coins/tokens.
I think the logic is pretty straightforward.
Traditional futures have an expiration date. Yes, the price may deviate from the spot price, but towards the expiry, the settlement must be made at around the spot price, so the initially deviated price naturally converges to the underlying price of the asset because of those folks who will be carrying out arbitrage trading.
Perpetual futures, on the other hand, have no expiration. So there is nothing that can keep the price anchored to the spot price long-term. That is why those funding rates were introduced. I think you have noticed that highly volatile assets even have their funding rate times adjusted to hourly or every 4 hours instead of every 8 hours.
Youre right that the Futures market is great, but it works because of Expiry and the price is fixed at that station. Perpetuals are like a train that never stops. Without a final station (expiry), the only way to keep the trader from going off track is the funding rate.Its the 'cost of holding' that forces the price to stay close to reality.If the perpetual price is higher than spot, the funding rate is positive. Longs pay shorts. This discourages excessive longing and keeps the price pinned to spot. Vice versa