How does funding rate affect position size?
I am using BTC/USD isolated perpetual coin futures
I contacted the support regarding this simple question and they told me that the funding rate is deducted from my position size, effectively meaning that with long enough time funding can deduct my position size into nothingness and I will make very little if any profits – example: I keep my position open for a couple of years and funding is always positive.
Is this really the case?
A google search tells me that the funding fees are deducted from the margin of my position, meaning that the profits and losses stay the same, relative to the position size no matter how much the funding fees are deducted, because the fees are deducted from margin, which does not affect the position size and there is always the option to add margin, even to an isolated position, in case I run out of margin because of funding, right?
Can someone help me and tell me which one is the correct answer?
Not sure if it relates to your case, but i am using BTC/BUSD cross perpetual futures.
So if i deposit in 2000 BUSD as collateral and open a long of 1 BTC @ 22k, after the funding round ( assuming BTC is @ 22k and 0.01% funding rate), i will have 1997.8 BUSD remaining (2.2 BUSD has been deducted from your collateral to be paid as funding fees).
So as time goes on, your collateral will reduce (if the funding rate remains positive and you have a long position open) and this will affect your liquidation price. Your position size will not change unless a liquidation event is triggered.
The later is correct. Funding fee will be deducted from your margin, and will only affect your liquidation price window (it will keep getting closer to your entry price).
Thank you for contacting us today, we’ll be more than happy to support you!
The funding rate is primarily used to force the convergence of prices between the perpetual contract and the underlying asset.
Unlike traditional futures, perpetual contracts have no expiration date. Thus, traders can hold positions to perpetuity unless he gets liquidated. As a result, trading perpetual contracts are very similar to spot trading pairs.
As such, crypto exchanges created a mechanism to ensure that perpetual contract prices correspond to the index. This is known as the Funding Rate. The funding rate is a fee charged every 8 hours, and is only charged when the user has an open position at the time it is charged.
The funding fee is always discounted or added directly to the users with open positions in perpetual futures contracts margin balance, at the exact moment when it occurs (00:00 UTC; 08:00 UTC and 16:00 UTC) and not on their open positions.
So, if you have an isolated position, only the funds that you sent to that isolated pair will serve as margin for the position, in this case only the fund in the BTC/USDT position will count as margin to maintain your position. So, whenever this margin is deducted from this position, it can get closer to liquidation.
And how does it impact traders? As funding calculations consider the amount of leverage used, funding rates may have a big impact on one’s profits and losses. With high leverage, a trader that pays for funding may suffer losses and get liquidated even in low volatility markets.
On the other hand, collecting funding can be very profitable, especially in range-bound markets.
Thus, traders can develop trading strategies to take advantage of funding rates and profit even in low-volatility markets.
Essentially, funding rates are designed to encourage traders to take positions that keep perpetual contract prices line in with spot markets.
We kindly invite you to check our guide with the essential infos to start into Futures Trading in our Blog: [https://www.binance.com/en/blog/futures/a-beginners-guide-to-funding-rates-421499824684900382](https://www.binance.com/en/blog/futures/a-beginners-guide-to-funding-rates-421499824684900382)
Thank you, DO
In periods of high volatility, the price between the perpetual contract and the mark price may diverge. In such instances, the premium increases or decreases accordingly.