ETH Funding Rates: What to Know About Exchanges, Risks, and Benefits

  • January 16, 2023
  • 2 Min Read

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Ethereum
ETH
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Perpetual contracts are a type of futures contract, but with no expiry date.

All perpetual contracts have a crucial mechanism called funding rate that makes their working possible. This funding rate is supported by longs or shorts in the market that work together to keep the perpetual’s price closest to the underlying crypto’s spot rate. If understood and used well, ETH perpetual contracts offer traders an excellent profit and/or passive income opportunity.

In this article, we’ll learn about ETH funding rates, how and where to make money off them and the risks involved.

ETH Perpetuals and Funding Rates, Explained

A futures contract is an agreement between two traders to buy and sell an asset at a pre-agreed price on or before a future expiry date. In the cryptocurrency market, this pre-agreed price is the crypto’s spot price when opening the contract.

An important characteristic of a futures contract is that it’s a type of derivative contract, implying that it derives its value from the underlying asset. The two traders only exchange the price difference from the opening and settlement time, with no actual asset exchanging hands.

Perpetual contracts work quite like futures but don’t have an expiry date. It means that you can keep a perp open indefinitely and close it whenever you want. Perpetuals are more popular than futures since they give traders the flexibility to close their positions anytime.

With perpetuals, traders can also earn a passive income in the form of a funding fee. The traders pay each other this fee depending on existing market conditions (bullish or bearish) and whether they’re long or short the perpetual contract.

ETH perpetual contracts are in great demand due to the token’s high market cap and price volatility, especially post ‘Ethereum Merge.’

  • What Are ETH Funding Rates?

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    Since ETH perpetual contracts don’t have an expiry date, exchanges need to keep their price close to the ETH spot rate. They do this with the help of a price anchoring mechanism called the ETH funding rate.

    This funding rate is used in the calculation of ETH funding fees payable by longs/shorts to their counterparties. The funding rate is positive in a bull market and negative in a bear market. In general:

    ETH funding fee = nominal value of position x funding rate

    An ETH perpetual contract’s price fluctuates and deviates from the spot rate based on the market conditions. In a bull market, more people would buy ETH perps, driving its price up.

    Thus, longs would pay a funding fee to the shorts, encouraging more shorts to enter the market and pull down ETH perp’s price closer to ETH spot rate. The opposite happens in a bear market.

    The funding fee is calculated and paid periodically, with time intervals varying from exchange to exchange. On most exchanges, it’s paid on an hourly, 4-hourly or 8-hourly basis.

A Positive ETH Funding Rate Means

  • Traders who are long have to pay a funding fee to traders who are short.
  • It’s a bull market, with ETH perpetuals trading at a price higher than ETH spot price.
  • You can hedge your ETH investments in the spot market by going short in perpetuals and also earn a funding fee.

A Negative ETH Funding Rate Means

  • Traders who are short have to pay a funding fee to traders who are long.
  • It’s a bear market, with ETH perpetuals trading at a price lower than ETH spot price.
  • How Do People Make Money Off ETH Funding Rates?

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    Arbitrage

    Arbitrage is a market-neutral trading strategy that helps you profit from different ETH funding rates on two different platforms. You open equal positions on both sides of the trade in an attempt to make a profit on the difference between the two. Let’s understand this with an example.

    Assume ETH funding rate is 0.009% on Exchange A and -0.003% on Exchange B, re-calculated and paid out hourly on both.

    This means that on Exchange A, longs will pay shorts a funding fee at the next 1-hour interval, calculated at 0.009%. On the other hand, on Exchange B, shorts will pay a funding fee to longs at the next 1-hour interval, calculated at -0.003%.

    Let’s assume you have $20,000 capital, and the funding rates remain unchanged for the next 24 hours.

    If you open a short position with a $10,000 margin on Exchange A, you’ll be paid a funding fee by longs every hour, as long as your position stays open. Your daily profit potential without any leverage will be ($10,000 x 0.009%) x 24 = $21.6. With 5x and 10x leverage, that translates to $108 and $216 per day, respectively.

    Similarly, opening a long position with a $10,000 margin on Exchange B, will earn you ($10,000 x 0.003%) x 24 = $7.2 per day (without leverage). Using 5x and 10x leverage will make you $36 and $72 per day, respectively.

    Your total revenue per day, excluding exchange fees and without leverage, will be $21.6 + $7.2 = $28.8. It’ll be $144 and $288 daily, with 5x and 10x leverage, respectively.

    However, please note ETH prices and funding rates keep fluctuating with changing market conditions. You’ll need to monitor them on both exchanges actively. Therefore, this can’t be termed as a ‘set it, forget it’ strategy.

    Cash and Carry

    The cash-and-carry strategy helps exploit discrepancies between an asset’s spot and perpetual contract price. Assume you have $2,220 capital, and ETH is currently trading at $2,000 in spot but at $2,200 in perpetuals.

    You buy 1 ETH for $2,000 in spot and simultaneously open a short position with $2,200 margin in the perpetual futures market. Assuming that you availed 10x leverage and the hourly funding rate stays 0.009%, your daily profit potential would be ($2200 x 0.009%) x 24 = $4.75 (excluding exchange fees).

    Why it’s called cash-and-carry is because traditionally, traders would ‘carry’ the asset in the spot market until the expiry of the futures contract. But since we’re dealing in perpetuals, you can carry the spot investment for as long as is feasible. Besides earning a funding fee, you can also book profit when the ETH prices in perpetual and spot markets converge.

    However, unlike the funding fee arbitrage example (where both trades can be leveraged), your profit potential in cash-and-carry is limited by available capital for spot investment.

    Price Prediction

    Historically, funding rates are found to reflect the general market sentiment around the underlying crypto asset.

    For instance, if the ETH funding rate is highly negative, it implies a bearish market sentiment. In this scenario, most ETH traders are seen shorting the crypto, expecting its price to fall further in future. The vice versa is true for a highly positive ETH funding rate.

    A higher funding rate, whether negative or positive, also suggests a higher deviation of the perpetual price from the spot rate. It is indicative of an overly optimistic or pessimistic market sentiment with a high probability of correction.

Where to Trade ETH Perpetual Contracts

ExchangeAccepts US Customers?Trading Pairs Offered For ETHHow Often Funding Rates Are SetHow Often Funding Rates are Paid OutLeverage Range for Perp Futures
BinanceNoETH-USDT, ETH-BUSD, ETH-USD8-hour intervals8-hour intervals Up to 100x Up to 50x Up to 100x
BybitNoETH-USDT, ETH-USDC, ETH-USD8-hour intervals8-hour intervals Up to 100x Up to 66.67x Up to 100x
dYdXNoETH-USD8-hour intervals1-hour intervalsUp to 20x

ETH perpetual trading pairs tell you which crypto/fiat assets you can use as margin to buy or sell the ETH perpetual contract. So, if it’s an ETH-USDT trading pair, you can deposit USDT tokens to open ETH long/short positions in the perpetuals market. On most platforms, ETH is paired with stablecoins like USDT, USDC, BUSD, or USD fiat for opening perpetual positions.

Different exchanges offer different trading pairs for ETH perpetuals. Below we’ve listed some well-known crypto exchanges and the ETH perpetual trading pairs supported by each:

  • Binance: ETH-USDT, ETH-BUSD, ETH-USD
  • Bybit: ETH-USDT, ETH-USDC, ETH-USD
  • dYdX: ETH-USD

Deciding which platform to use for ETH perpetual trades will depend on multiple factors, including your location, trading strategy, personal preferences and transaction fees.

Most exchanges don’t offer ETH perpetuals in the US and UK due to regulatory restrictions. The extent of leverage you prefer using in your trades would also determine your choice of trading platform. For instance, while Binance offers up to 100x leverage.

The ETH perp funding rates may vary from exchange to exchange as well, thus providing profitable opportunities to arbitrageurs. To give an example, Binance’s funding rate is 0.0045% as compared to dYdX’s -0.0008% for ETH-USDT trading pair at press time.

1. Binance

  • Binance ETH Leverage and Margins

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    Leveraged trading involves borrowing funds to increase the size of your trade positions. In crypto perpetuals, it’s mostly exchange platforms that lend these funds based on their risk tolerance.

    The amount you can borrow will depend on your initial deposit, called the initial margin. In general, the smaller the initial margin, the more you can borrow. Apart from the initial margin, you’re also required to deposit a maintenance margin.

    In case of adverse price movements, it is necessary to maintain your position. Both initial and maintenance margins are percentages of your position value and increase with a corresponding increase in the latter. They also vary from one trading pair to the other.

    Notional Value in USDTMax LeverageMaintenance Margin RateMaintenance Amount (USDT)
    0 - 100,000100x0.50%0
    100,000 - 250,00075x0.65%150
    250,000 - 1,000,00050x1.00%1,025
    1,000,000 - 5,000,00025x2.00%11,025
    5,000,000 - 10,000,00010x5.00%161,025
    10,000,000 - 20,000,0005x10.00%661,025
    20,000,000 - 40,000,0004x12.50%1,161,025
    40,000,000 - 80,000,0003x15.00%2,161,025
    80,000,000 - 150,000,0002x25.00%10,161,025
    150,000,000 - 300,000,0001x50.00%47,661,025

    Leverage and Maintenance Margin Table for ETH-USDT Perpetual, Source: Binance.com

    Binance has a tier-based fee structure, with trading fees varying from 0% to 0.04% depending on your BNB balance and 30-day trading volume.

    It calculates and pays out its funding rates every 8 hours. Traders pay/receive funding fees only if they have open positions at pre-specified funding times. The updated funding rate and the next funding cut-off time are clearly displayed on the ETH perpetual trading page above the chart. Binance calculates its funding rate and funding fee as follows:

    Funding Fee = Nominal Value of Positions x Funding Rate

    Nominal Value of Positions = Mark Price x Size of a Contract

    Funding Rate (F) = Average Premium Index (P) + clamp (Interest Rate – Premium Index (P), 0.05%, -0.05%)

Read our full Binance review, or start trading ETH perpetuals on Binance.

2. Bybit

  • Bybit ETH Leverage and Margins

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    Bybit offers up to 100x leverage on perpetual trades. You’ll need to deposit an initial and maintenance margin of 1% and 0.5%, respectively, to open and maintain an ETH-USDT perpetual position of up to 900,000 USDT value.

    For positions valued higher than that, the initial and maintenance margin percentages will increase in a tiered manner. Details on ETH-USDC and ETH-USD margins can be found on linked-to pages.

    Position Value in USDTMax LeverageMaintenance Margin RateInitial Margin Rate
    900,000100x0.50%1.00%
    1,500,00050x1.00%2.00%
    3,000,00036.36x1.50%2.75%
    4,500,00028.57x2.00%3.50%
    6,000,00023.53x2.50%4.25%
    7,500,00020x3.00%5.00%
    9,000,00017.39x3.50%5.75%
    10,500,00015.38x4.00%6.50%
    16,000,00013.79x4.50%7.25%
    18,000,00012.5x5.00%8.00%
    20,000,00011.43x5.50%8.75%
    22,000,00010.53x6.00%9.50%
    24,000,0009.76x6.50%10.25%
    26,000,0009.09x7.00%11.00%
    28,000,0008.51x7.50%11.75%
    30,000,0008x8.00%12.50%
    32,000,0007.55x8.50%13.25%
    34,000,0007.14x9.00%14.00%
    36,000,0006.78x9.50%14.75%
    38,000,0006.45x10.00%15.50%
    40,000,0006.15x10.50%16.25%
    42,000,0005.88x11.00%17.00%
    44,000,0005.63x11.50%17.75%
    46,000,0005.41x12.00%18.50%
    48,000,0005.19x12.50%19.25%

    Leverage, Initial Margin and Maintenance Margin Table for ETH-USDT Perpetual. Source: Bybit

    Like its peers, ByBit’s trading fee structure is also tier-based. Its trading fees for perpetual contracts range from 0% to 0.06%, depending on your user level. The funding fee is calculated and paid out every 8 hours, based on the following formulae:

    Funding Fee = Position Value x Funding Rate

    Position Value = Quantity of Contract / Mark Price

    Funding Rate (F) = Premium Index (P) + Clamp (Interest Rate (I)Premium Index (P), 0.05%, -0.05%)

Read our full Bybit review, or start trading ETH perpetuals on Bybit.

3. dYdX

  • dYdX ETH Leverage and Margins

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    dYdX is a decentralized crypto exchange (DEX) that allows you up to 20x leverage on perpetual trades. The initial and maintenance margin requirements begin at 5% and 3%, respectively, for ETH-USD perpetual trades. The initial margin requirement remains at 5% until the baseline position of 500 ETH. Thereafter, it increases linearly by 0.01 per 100 ETH.

    Underlying AssetBaseline PositionIncremental PositionMax Position SizeIncremental Initial Margin Fraction
    ETH50010010,0000.01

    Source: dYdX

    The platform doesn’t charge any fee to users with the last 30-days trading volume below $100,000. Above that, the trading fee ranges from 0.05% to 0% based on 30-day volume. You can avail fee discounts of up to 50% if you hold dYdX’s Ethereum-based NFT assets called Hedgies.

    dYdX pays out funding fees in USDC tokens on an hourly basis. However, its funding rate is calculated every 8 hours, as follows:

    Funding Fee = Size of the Position (S) x Index price for the market supplied by Oracle (P) x Funding Rate (R)

    Funding Rate = (Premium Component / 8) + Interest Rate Component

Read our full dYdX review, or start trading ETH perpetuals on dYdX.

Final Thoughts on ETH Funding Rates

Funding rates can seem a bit complex to people new to perpetual trades. We have done our best to simplify them and make them understandable even for absolute beginners. Simply put, funding rates are a mechanism through which the price of ETH perpetual contracts is kept closest possible to the ETH spot rate.

This is necessary because perpetual contracts never expire, and their opening and closing prices must reflect the prevailing market price. We discussed how to profit from funding rates and some popular exchanges you can use for that purpose.

Frequently Asked Questions

  • How are ETH funding rates calculated?

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    Different exchanges have different methods of calculating ETH funding rates. They are derived from two important factors – premium component and interest rate. The premium component quantifies the perpetual price’s deviation from the spot rate, and the interest rate is a constant percentage.

  • What are the ETH funding rates taxes?

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    The earnings from ETH funding rates may incur ETH funding rates taxes in some countries. You should refer to crypto tax laws in your state or country to learn more about this.

  • Who pays ETH funding rates?

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    The ETH funding rates are paid by traders to each other. If the ETH funding rate is positive, longs pay shorts, and if it’s negative, shorts pay longs.

  • How do ETH perpetual futures work?

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    ETH perpetual futures work by connecting buyers and sellers willing to speculate on ETH’s future price movements. Since the prices of ETH perpetual contracts are tied to the ETH spot price through funding rate, they can be speculated on without any actual exchange of ETH.

  • What are the risks of ETH perpetual futures?

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    The price of ETH, like that of all cryptocurrencies, is highly volatile in nature. Any abrupt movements against your position can cause you huge losses, especially if it's leveraged.

  • Can you trade ETH funding rates in the US?

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    No. The crypto regulations in the United States prevent exchange platforms from offering ETH perpetual contracts in the country.



Contributors

  • Avatar of Lipsa Das

    Lipsa DasWriter

    Lipsa is a developer turned writer with a knack for making crypto simple. Her writing has been featured on BloomTech, Hedgehog, DZone and so on.

  • Avatar of Shannon Ullman

    Shannon Ullman is a senior editor for MilkRoad.com. Shannon specializes in cryptocurrency and personal finance. Her work has appeared in publications like The Motley Fool and Insider.