Bybit Funding Fees

Perpetual contract trading is an innovative financial instrument that allows traders to speculate on the price of an underlying asset without the need to own it. It is similar to futures contracts, whereby traders can leverage their capital and don’t have to exchange the assets immediately.

The most distinct feature of a perpetual contract is that it doesn’t have an expiration date, unlike traditional futures contracts. This means that traders can hold onto the contract for as long as they want, technically indefinitely. As a result of this lack of a fixed delivery date, the contract price and the spot price may never converge.

To bridge this gap and to keep the perpetual contract trading price anchored to the spot price, Bybit, a cryptocurrency derivatives exchange, employs a funding mechanism. This mechanism ensures Bybit’s last traded price always aligns with the global standard spot prices, thereby promoting a fair and stable trading environment.

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Funding Fees: The Heart of the Mechanism

Bybit’s funding mechanism operates on a fundamental principle – if the trading price is higher than the spot price, long position holders will have to pay funding fees to short position holders. The reasoning behind this is to encourage traders to open more short positions, leading to a reduction in trading prices, and consequently moving the price towards the spot price.

On the flip side, if the trading price is lower than the spot price, short position holders will have to pay the funding fees to the long position holders. This places long position holders in a favorable position to open more positions, thus driving the prices up, and narrowing the spread.

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Funding Mechanism in Action

Bybit employs this funding mechanism across its trading platform, calculating the funding fee for USDT Perpetual Contracts and Inverse Perpetual Contracts immediately based on the rate derived from the current funding interval. The funding rate computed between 12AM UTC and 8AM UTC will be applied to your funding fees at 8AM UTC.

It’s worth noting that Bybit’s funding fee incurs every 8 hours, yet every trading symbol has its unique funding time interval. Depending on the live market situation, Bybit reserves the right to adjust the funding time interval, particularly when there is a significant price discrepancy between the Last Traded Price and Mark Price.

Remember, the exchange doesn’t collect these funding fees. Instead, they are exchanged between the long and short positions. If the funding rate is positive, long position holders will pay trading fees to short position holders. Conversely, if the funding rate is negative, short position holders will end up paying trading fees to long position holders.

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Breaking Down the Funding Fee Calculation

To understand the funding fee calculation, let’s examine the formula:

  1. Position Value = Quantity of Contract/Mark Price
  2. Funding Rate = Premium Index (P) + Clamp [Interest Rate (I) − Premium Index (P), 0.05%, −0.05%]
  3. Funding Fee = Position Value × Funding Rate

As a practical example, consider Trader A, who holds a long position of 20,000 BTCUSD inverse contracts. The Mark Price is 18,000 USD at the funding timestamp with the current funding rate at 0.01%.

First, we calculate the Position Value:

Position Value = 20,000/18,000 = 1.11 BTC

With the Position Value, let’s calculate the Funding Fee:

Funding Fee = 1.11 BTC × 0.01% = 0.00011 BTC

As the funding rate is positive (0.01%), the long position holders have to pay the short position holders. Therefore, Trader A has to pay a funding fee of 0.00011 BTC, and a short position holder with the same quantity of contract and mark price will receive the funding fee.

The Situation of No Funding Fees

The funding fee may sometimes be zero. This can occur in two scenarios:

  1. If the Premium Index and Interest Rate balance each other out in the funding rate formula, the funding rate becomes zero. This means there is no price difference between the perpetual contract market and the spot market, thereby negating the need for a funding fee.
  2. If you close your position before the funding timestamp, no funding fee is applied. This is because funding fees are designed to incentivize traders to bring the perpetual contract price closer to the spot price. If your position is already closed, there’s no need for such an incentive.

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How Bybit Ensures Fairness

To ensure that the funding mechanism is fair and does not favor any party, Bybit uses a combination of the Interest Rate and Premium Index to calculate the funding rate. The Interest Rate is a fixed value, ensuring stability, while the Premium Index is dynamic, reflecting the actual market conditions.

Moreover, Bybit has implemented the “Clamp” function in the funding rate formula. This function caps the maximum funding rate to a specific limit (0.05% in the case of Bybit), preventing the funding rate from getting excessively high or low.

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Bybit’s funding fee mechanism is a crucial tool to maintain market equilibrium. It ensures that the perpetual contract prices on Bybit always align with the global standard spot prices. This system provides a balanced trading environment and prevents potential manipulations. However, it’s vital for traders to understand how this mechanism works, as it could impact their trading profitability. Always keep an eye on the funding rate and your position status to make the most of your trading journey.

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