Contents of the article:
What are futures funding rate?
Why are futures funding rates important?
What is futures insurance fund (risk protection fund)?
How does futures insurance fund (risk protection fund) work?
What are the differences between index price and mark price?
What are futures funding rate?
Crypto funding rates are a dynamic system used by exchanges which determine the funding rate at specific intervals. It works by tracking supply and demand on the exchange and then setting a funding rate to maintain equilibrium. This funding rate is then used to automatically balance trader positions by crediting or debiting crypto accounts, depending on the direction of their trades. By doing this, the funding rate helps to ensure fair trading conditions while also preventing potential market manipulations or price distortions due to large trader positions.
Calculating funding rates in crypto perpetual contracts can be a complex process. This is because funding rates are constantly changing and there are a variety of factors that contribute to these changes. Some of the factors that can affect funding rates include the price of the underlying asset, the interest rate of the funding currency, and the liquidity of the market. funding rates can be either positive or negative, and this will impact whether traders are able to profit from their positions.
On our XT Futures platform, funding rates (highlighted in red) and a countdown to the next funding (highlighted in yellow) are displayed as below. Volatility can cause the prices of a perpetual contract and its mark to fluctuate considerably. In such cases, traders must pay attention to both spread width and premium level; wide spreads typically mean high premiums while narrow ones come with low premiums. A positive funding rate signals that long positions are at an advantage as their price is higher than the mark’s, resulting in paying for the shorts. The opposite holds true when rates are negative - it’s then up to short holders’ wallets rather than those of longs’.
Why are futures funding rates important?
Crypto funding rate plays an important role in the health and stability of the cryptocurrency market. This funding rate is the cost that traders pay one another for using margin trading to trade cryptos with leverage. Essentially, Funding Rates are designed to encourage traders to take positions that keep perpetual contract prices line in with spot markets. Not only does this help keep the markets liquid, it creates more price discovery which can lead to efficient pricing overall - this helps both buyers and sellers transact at a fair price. Moreover, funding rates prevent large swings or over-leveraging from destabilizing the crypto markets.
Funding rates can mean a world of difference for any trader; high leverage could quickly deplete one’s profits or even lead to liquidation. However, by developing strategies around funding opportunities and taking advantage of range-bound markets, savvy traders may never fall into the ‘high risk’ category again! By monitoring rate fluctuations carefully and acting accordingly with their positions in perpetual contracts versus spot prices, success is almost guaranteed - no matter how low volatility gets.
What is futures insurance fund (risk protection fund)?
Insurance funds are a vital component of crypto derivatives trading, safeguarding traders from disastrous losses. Working like an impenetrable safety net, insurance funds serve to protect bankrupt traders while simultaneously securing the profits of those in-the-black - offering peace of mind to all involved parties. Not only do they guard against large losses from leveraged positions, but also guarantee full payout to winning traders, acting as a defensive barrier against uncontrollable market forces such as leveraged trade contract loss exceeding initial margins.
The XT Risk Protection Fund is an innovative solution to protect traders from costly forced liquidations due to bankrupt counterparties. By using the margin of non-bankrupt users, it offers a buffer against losses when high leverage trades are affected by market volatility or other factors. This fund helps safeguard profitable positions and ultimately gives traders peace of mind in their investments.
You can access the insurance fund (risk protection fund) balance of BTC/USDT, ETH/USDT, BTC/USD, ETH/USD, and all other futures contracts by clicking [Information] - [Provision of risks] on the XT Futures trading interface. Alternatively, you can directly visit [Provision of risks].
How does futures insurance fund (risk protection fund) work?
Let’s begin with an examination of how the XT Futures provision of risks works:
In uncertain times, the provision of risks (insurance fund) proves its worth by preventing auto-deleverage liquidations. Trader A and Trader B both took a leap of faith by entering into the same BTC/USDT perpetual futures long position despite varying market conditions.
The following events unfold on Trader A’s account:
1. Trader A goes long BTC/USDT at $8,000, with a liquidation price of $7,700 and a bankruptcy price of $7,600.
2. As BTC prices plunged beyond $7,700, Trader A enters liquidation and the liquidation engine places an immediate order to sell above $7,600 (the bankruptcy price).
3. The liquidation order is filled at $7,650, a liquidation fee is charged to Trader A.
4. The liquidation fee is transferred to the provision of risks.
Meanwhile, the following events play out in Trader Bs account:
1. Trader B goes long at $8,000 with a liquidation price of $7,700 and a bankruptcy price of $7,600.
2. Due to a sudden jump in volatility, the market price is now at $7,550, below the bankruptcy price.
3. XT Futures takes over the remaining positions from the bankrupt trader whose account is in negative equity.
4. Through its provision of risks, XT Futures offloads them onto the market progressively.
5. The liquidation engine places an immediate order to sell and fills the order at $7,500.
6. As Trader B is already in negative equity, XT Futures’ provision of risks covers the deficit. As a result, ADL has been avoided.
What are the differences between index price and mark price?
Index Price is the average market price of cryptocurrencies on major spot crypto exchanges in perpetual futures. It takes into account an anticipatory mechanism to make sure prices swing within a reasonable range, and it’s also the main factor behind determining mark price.
Mark Price refers to an estimated true value of a contract. It is the price used for mark-to-market PnL calculation and platform liquidation; Mark price is also designed to be fair and manipulation resistant. XT Futures uses Mark Price as a trigger for liquidation.
You can access the index price of BTC/USDT, ETH/USDT, BTC/USD, ETH/USD, and all other futures contracts by clicking [Information] - [Index Price] on the XT Futures trading interface. Alternatively, you can directly visit [Index Price].
You can access both the index price and mark price of BTC/USDT, ETH/USDT, BTC/USD, ETH/USD, and all other futures contracts from futures trading interface.
About XT Futures
XT.COM derivative trading platform offers some of the best features available on the market. With USDT-margined perpetual and quarterly contracts, as well as coin-margined perpetual and quarterly contracts and prediction markets, you’ll be able to access easy, fast trades. Plus, with copy trading, futures grid trading and more advanced tools at your disposal, the possibilities are endless. Our platform strives to cater to our large user base by providing a secure, trusted and intuitive trading experience.