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Funding Rate of Digital Assets: How to Avoid Being Misled

Published 08/06/2020, 12:25 PM
Updated 08/06/2020, 02:00 PM
Funding Rate of Digital Assets: How to Avoid Being Misled

Since the “digital Sleeping Beauty,” Bitcoin (BTC), woke up about two months after its third halving in mid-May 2020, we have read a lot about the “funding rate” of digital assets futures — from good to completely misleading reports. We just wanted to chime in on that trendy topic.

First, it is important to understand what this “funding rate” is, as it only relates to digital assets derivatives. In traditional finance, futures contracts in which prices are derived from the spot price of the same underlying asset have a predefined expiration: monthly and/or quarterly. Small divergences can occur between the spot price and the future price link to the same instrument, but these divergences disappear when the futures expire, assuring the holder of a future the same price at expiration as the spot price of the same underlying crypto. These divergences tend to be transient, as the futures market is very efficient, and any discrepancy leading to arbitrage between futures and spot prices is quickly removed by experienced traders.

How to use the funding rate when trading crypto?

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