What Is a ‘Perpetual Swap’ and How Does Its Funding Rate Function?
A perpetual swap is a derivative contract that allows traders to speculate on the future price of an asset without an expiry date, mimicking a spot market position. The funding rate is a periodic payment between the long and short sides of the contract.
If the swap price is above the spot price, the rate is positive, and longs pay shorts. If below, the rate is negative, and shorts pay longs.
This mechanism keeps the perpetual swap price anchored to the spot price.
Glossar
Positive Funding Rate
Mechanism ⎊ A positive funding rate within perpetual futures contracts, prevalent in cryptocurrency derivatives exchanges, signifies a prevailing long bias amongst traders.
Perpetual Swap Price
Index ⎊ The perpetual swap price represents the market price of a perpetual futures contract, which is designed to closely mirror the price of the underlying cryptocurrency index.
Funding Rate
Mechanism ⎊ Funding Rate represents a periodic payment exchanged between traders holding opposing positions in perpetual futures contracts, establishing an equilibrium between contract prices and the underlying spot market.
Perpetual Swap
Mechanism ⎊ Perpetual swaps, within cryptocurrency markets, represent agreements to exchange cash flows based on the difference between a cryptocurrency’s current price and a user-defined price, perpetually, without an expiration date.