How Does a Positive Funding Rate Affect Long and Short Positions?
A positive funding rate means that the perpetual swap contract is trading at a premium to the spot price. In this scenario, long position holders must pay a fee to short position holders.
This payment incentivizes traders to open new short positions and close long positions, which puts downward pressure on the perpetual contract price, helping it converge back to the spot price.
Glossar
Positive Funding
Funding ⎊ In cryptocurrency derivatives, particularly perpetual futures and options, positive funding rates represent a scenario where the current futures price exceeds the spot price.
Funding Rate
Cost ⎊ The Funding Rate is the periodic payment exchanged between long and short positions in perpetual futures contracts, designed to anchor the contract price to the underlying spot index price.
New Short Positions
Position ⎊ New short positions represent the initiation of trades where market participants borrow an asset and sell it, anticipating a future price decrease to buy it back at a lower cost.
Positive Funding Rate
Mechanism ⎊ A positive funding rate within perpetual futures contracts, prevalent in cryptocurrency derivatives exchanges, signifies a prevailing long bias amongst traders.
Long and Short
Position ⎊ Long and short represent the two primary directional positions in financial markets.