Explaining BitMex Perpetual Contracts and Crypto Funding Rate
A Perpetual Contract trades like a Futures Contract, but never settles and never expires.
What is a Bitmex Perpetual Contract?
Bitmex Perpetual Contracts are derivatives similar to classic Futures Contracts. These contracts enable crypto traders to speculate on both directions of the price of a cryptocurrency asset. Compared to Futures Contracts we can spot these differences:
- Perpetual Contracts don’t expire (there is no daily settlement)
- The price of a Perpetual Contract trades significantly closer to the underlying Index Price compared to a similar Futures Contract
- The primary price-spotting mechanism of a Perpetual is Funding. This mechanism allows the perpetual contract to be priced very close to the price of the spot market (explained briefly below)
What is a Perpetual Swap?
Perpetual Swaps are derivatives offered by the OKex exchange and trade similarly to Bitmex Perpetual Contracts. Again, they are like Futures Contracts, but without expiries and daily settlements.
What are Bitmex Funding Rates?
Funding is a mechanism of the perpetual contract that aims to incentivize traders to open positions in the direction of the spot market. Funding occurs every 8 hours, and traders will pay or receive funding if they hold a position at 04:00 UTC, 12:00 UTC, or 20:00 UTC.
Funding Rate Full Calculations
The funding at Bitmex is calculated as:
■ Funding = Position Value X Funding Rate
□ Position value refers to the number of contracts
□ Funding Rate includes two components:
(1) Interest Rate, and
(2) Premium / Discount
(1) Interest Rate Component
Every perpetual contract consists of two instruments: Base currency and Quote currency.
■ Interest Rate (I) = (Quote Index - Base Index) / 3 Where:
□ Interest Base Index is the Interest Rate for borrowing the Base currency
□ Interest Quote Index is the Interest Rate for borrowing the Quote currency
□ The Funding Interval is 3 as funding occurs every 8 hours ( 3 x 8 hours = 1 day )
(2) Premium / Discount Component
The perpetual contract may trade at a premium or a discount to the Mark Price. Each contract’s Premium Index is calculated as follows:
■ Premium Index (P) = {Max(0, Impact Bid Price - Mark Price) - Max(0, Mark Price - Impact Ask Price)} / {Spot Price + Fair Basis used in Mark Price}
Funding Rate Key Points
- The funding mechanism incentivizes traders to create positions in the direction of the spot market
- Bitmex Funding Rate applies only to the Bitcoin and Ethereum perpetual contracts
- When the Funding Rate is positive (+) longs pay shorts, and when it is negative (-) shorts pay longs
- The higher the premium, the more longs will have to pay shorts, and the higher the discount the more shorts will have to pay longs
- Funding occurs every 8 hours (04:00 UTC | 12:00 UTC | 20:00 UTC)
- High trading leverage increases the Funding Rate
- High market volatility increases the Funding Rate
- Bitmex applies Rate Caps on the Funding Rate as follows:
- The absolute Funding Rate is capped at 75% of the Initial Margin - Maintenance Margin
- The Funding Rate may not change by more than 75% of the Maintenance Margin between Funding Intervals
■ Perpetual Contracts and Crypto Funding Rate
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