Funding Rates in Crypto - Everything you need to know | Tradingriot

Summary

This video delves into the intricacies of funding rates in crypto perpetual swap contracts. It clarifies misconceptions, explains how funding rates reflect the price disparity between perpetual futures and spot markets, and their impact on traders' positions. The presenter uses various examples to illustrate how extreme funding rates can signal market sentiment and offers insights on integrating funding rates with other indicators for a comprehensive market analysis. The video concludes with practical tools for examining funding rates and a cautionary note on their interpretation in low liquidity altcoins.

Takeaways

• 💡 Funding rates are a mechanism unique to crypto perpetual swap contracts, reflecting the cost of holding a position.
• 🔄 A positive funding rate indicates that perpetual swap prices are above the spot price, and longs pay shorts; conversely, a negative rate means shorts pay longs.
• 📈 High funding rates do not always indicate a bullish market; they can be the cost of doing business or a sign of market sentiment.
• 📊 It's important to consider funding rates alongside other indicators like open interest and volume to get a comprehensive market view.
• 🌐 The frequency of funding rate payments varies by exchange, with many paying every eight hours, though some like FTX used to pay hourly.
• 📉 During market flushes, funding rates can turn negative as the perpetual contract price falls below the spot price, often leading to liquidations.
• 📈 Extreme funding rates can signal market tops or bottoms, but should be interpreted with caution and in context.
• 🚫 Be cautious of low liquidity altcoins with sudden price spikes, as they can lead to extremely negative funding rates and potential buying at the top.
• 🛠 Tools like TradingView's perpetual swaps and CoinGlass.com can help traders analyze funding rates across different exchanges.
• 💼 Delta neutral strategies can be employed by taking long and short positions on different exchanges with varying funding rates to collect the funding difference.
• 🔗 For further learning, consider the speaker's boot camp and PDF resources, which provide more detailed insights into trading and funding rates.

Q & A

What is the funding rate in the context of cryptocurrency trading?

The funding rate is a unique mechanism introduced in crypto perpetual swap contracts. It reflects the difference between the perpetual swap price and the spot price, and traders with long positions pay those with short positions when the perpetual swap is trading above the spot price, and vice versa.

How often do funding rates get settled on most exchanges?

On most exchanges, including Binance and Bybit, funding rates are settled every eight hours. However, some platforms, like FTX before it ceased operations, used to settle hourly.

What is the significance of a positive funding rate?

A positive funding rate indicates that the perpetual swap is trading above the spot price, meaning that long position holders pay a fee to short position holders.

What does a negative funding rate imply for traders?

A negative funding rate implies that the perpetual swap is trading below the spot price, which means that short position holders pay a fee to long position holders.

Why shouldn't traders rely solely on funding rates to make decisions?

While funding rates can provide insights, relying solely on them can be misleading. Traders should consider other indicators like open interest, volume, and price action to get a more comprehensive understanding of the market.

What is the relationship between open interest and funding rates?

An increase in open interest often coincides with an increase in funding rates, suggesting more directional long positions. However, it's important to consider the context and not just the levels of these indicators.

Can high funding rates always be considered a bearish signal?

No, high funding rates do not always signal a bearish market. In a strong bull market, funding rates can remain high for extended periods, so it's essential to consider the broader market context.

What are some examples of how funding rates can mislead traders?

The script provides examples like the Optimism (OP) rally, where despite high funding rates and open interest, the price eventually corrected. Another example is low liquidity altcoins that experience sudden price spikes, leading to extremely negative funding rates which can trap buyers.

What are some tools mentioned in the script for analyzing funding rates?

The script mentions using platforms like TradingView for perpetual swaps, and websites like Coinglass.com to analyze funding rates across different exchanges.

What is the concept of delta-neutral trading in relation to funding rates?

Delta-neutral trading involves taking an equal and opposite position on different exchanges to profit from the difference in funding rates without taking a directional market position.

How can traders use the information about funding rates to their advantage?

Traders can use the information about funding rates to identify potential overextensions in the market and look for opportunities to fade extreme funding levels, but they should always combine this with other market data for better decision-making.