BTC funding rates and what it means for investors
Good day famaily, I have learnt about a very important concept which I will be sharing with you. As a cryptocurrency investor/trader, it’s important to understand the concept of funding rates when trading. In this post, I will be explaining funding rates in the context of Bitcoin trading, although it is applied equally in other cryptocurrencies.
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Funding rates refer to the additional fees that investors must pay in order to maintain their open positions. This is typically a fee paid every 8 hours, and is paid to the other side of the trade, i.e. the person who is taking the opposite side of the trade.
The funding rate is determined by the difference between the futures price and the spot price of bitcoin. When the futures price is higher than the spot price, the funding rate is positive and when the futures price is lower than the spot price, then the funding rate is negative.
Bitcoin funding rates are paid to lenders when two parties enter into a “margin call”. When an investor opens a margin call, they borrow a certain amount of bitcoin to trade. The lender then charges a fee for each day that the loan is open. That fee constitute bitcoin funding rate.
funding_rates.png funding rates BTCUSDT perpertual for the past 14days src
What does this mean for bitcoin investors?
When the funding rate is positive, it means that traders will receive an additional fee for keeping their positions open. This could be a great way to earn passive income from bitcoin trading, as traders can simply keep their positions open and collect the fees without having to actively trade.
On the other hand, when the funding rate is negative, it means that traders will have to pay an additional fee for keeping their positions open. This could be a costly mistake for traders, as they could be eating into their profits if they have a large open position.
It’s important to keep an eye on the funding rate when trading bitcoin, as it can have a big impact on your overall profits or losses. For instance, if the funding rate is high, it can be more difficult to make a profit from a trade. On the other hand, if the funding rate is low, it can be much easier to turn a profit. The good news is that some trading platforms will let you set a limit on the funding rate, so that you can avoid having to pay too much in fees.
The funding rate is important to investors because it can provide insight on the market’s sentiment. If investors believe the market is too risky, the funding rate will be higher, and vice versa. The higher the funding rate, the more expensive it is to borrow bitcoin, which can make it difficult to enter into trades.
Bitcoin funding rates can also be used to measure market liquidity. If a market has a high funding rate, it indicates that there is a lot of demand for bitcoin and that it is more likely to be traded. On the other hand, if the funding rate is low, there may not be enough buyers and sellers in the market, making it more difficult to make a profit.
I hope you found this useful. I am Abdul-Salam Issahaku, from Ghana. I am a student web developer and a blockchain enthusiast. I blog about technology and investments. You can follow me to be part of my Hive family. Thank you for your time.
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