“Funding” Of The Perpetual Contract — The Invisible “Position Killer” Disguised As “Coordinator” Between The Longs And The Shorts
You will not believe that if you have a position of 10 million, and it is destined to be liquidated in less than a day. Investors may not know that the funding is the “culprit”.
Since the debut of funding, it is known as the “coordinator” of the perpetual contract market to make a balance between the longs and the shorts, but is this true? The answer is no, and some veteran investors have discovered the truth of funding — the invisible “position killer”.
Why Is This “Position Killer” Invisible?
Funding is generally referred to by investors as “carrying charge” or “overnight fee”. It’s hard to understand it thoroughly, and what you need to pay attention to is the charging problem that is closely related to you.
Generally, the funding rate is periodic payments exchanges between longs and shorts over a specific period and is used to calculate the funding amount to be paid or received at the funding timestamp, usually two to three times a day. That said, except for trading fees, you’ll have to pay several additional fees due to the existence of “funding”.
“The rate collected is less than 0.4%, why you make a fuss?” Indeed, the industry usually controls the funding between -0.375% ~ +0.375%, which seems to be insignificant. The truth is not hidden deliberately but has been ignored. Why can’t you see this “position killer”? Because it is covered by “leverage” and “maintenance margin”, among them, “leverage” makes you overlook the danger of ”funding”, while the “maintenance margin” helps “funding” block the retreat of the position.
Let’s take a look at how your positions are “killed” by “funding” under the cover of “leverage” and “maintenance margin”.
“The Position-Killing Process”
A few days ago, Mr. Bai traded XBTUSD (BTCUSD) perpetual contract at BitMEX (BM), his position was still be liquidated although the market price did not reach the liquidation price. Why did it happen? How did it happen? Let’s see the details of the whole “killing process”.
1)Position Value = 8,000 Contracts *1USD*1/10000=0.8BTC;
Original Principal = Position Value / Leverage = 0.008 BTC
2) Two Payments Exchanges = Position Value * Funding Rate * 2 = 0.8 * 0.3% ** 2 = 0.0048 BTC
3) Remaining Principal After Two Exchanges (Margin) = 0.8BTC/100–0.0024BTC*2=0.0032BTC
We can see that 60% of your principal was “killed” after two payments exchanges (0.0048/0.008*100%). But why? Because “leverage” succeeded in providing the cover, and your memory of leverage only stayed at the moment of opening a position. Now you may understand that you rely on the high leverage to obtain high returns, while the funding uses such leverage to swallow up your principal.
Remember the data of 0.0032BTC, cause this is the crucial line that determines whether you can hold the position or be liquidated.
What are the rules for deciding the liquidation of a position? Apparently, the liquidation price has not arrived, but the essence is whether the available margin (the remaining principal under the isolated margin model) can meet the lower limit of the maintenance margin. What index is used to measure this boundary? It is another cover for funding — maintenance margin, which determines the threshold of the remaining principal for the survival of your position. The maintenance margin for the BTC perpetual contract on the BM platform is 0.5%. Then the lower limit of the maintenance margin is:
Lower Limit Of Maintenance Margin = Position Value *0.5%=0.8BTC*0.5%=0.004BTC
Obviously, after two payments exchanges, the remaining principal of 0.0032BTC is less than the lower limit of the maintenance margin 0.004BTC, and the position will enter the liquidation process according to the rules.
At this point, the “killing process” is clearly displayed. Before this explanation, you may fully accept the funding as the “coordinator” between the longs and the shorts, and ignore the covering role of leverage and maintenance margin.
How Cruel Is This “Position Killer”
When you finally accept the cruel fact that the “coordinator” is indeed a “position killer”, however, you may not realize that this is just the tip of an iceberg. Under the cover of “leverage” and “maintenance margin”, the “position killer” — funding will make more positions of investors be liquidated faster. Let’s take BM as an example to make a simple calculation:
Open Positions: 100 CONTR (1 CONTR = 100USD)
Margin Mode: Isolated Margin
Funding: Collected every 8 hours with a funding rate of 0.3%
Maintenance Margin: 0.5%
Regardless of the market and any other fees
Liquidation cycles based on leverages:
We can see that a position worth of 10,000 US dollars, regardless of markets and fees, if with a 10x leverage, it will be liquidated after 12 days; if with a 20x leverage, it can be held for 5 days before being liquidated; however, if using a 100x leverage, only one day is required for the liquidation. Unexpectedly, your selecting of the leverage and acceptance of the maintenance margin are equivalent of setting the “liquidation cycle” for the position and determining the “liquidation technique” for funding.
There is no doubt that the higher the “maintenance margin” and the “funding rate” are designed, and the higher the leverage you choose, the faster the position will be liquidated. In reality, the design of some digital exchanges may even more unfriendly, let’s see the real parameters taken from three exchanges:
The above data is taken from the product description or fee records of their official websites accordingly without any exaggeration. Here are some incredible discoveries:
1) BitMex’s funding rate even reaches 0.5%, which means that half of the principal will be deducted for each exchange of funds.
2) OKEx’s maintenance margin is actually up to 93.5%, which means that you can’t add any leverage, and once you added, your position would be liquidated.
3) Although Gate.io is at the intermediate level, the maintenance margin is also five times of 0.5%.
After removing the extreme data, we take the critical data from the three: a maintenance margin of 2.5% and the funding rate of 5.0%, to re-evaluate the relationship between leverage and the liquidation cycle, conclusions are shown below:
A dramatic scene emerged. Under such setting, the position can be held up to 16 hours (the funding generally occurs every 8 hours), it’s even impossible to use a 50x or 100x leverage. After seeing the truth, you may understand why those exchanges do not set 50x, or 100x high leverage. It’s not their unwillingness to do so, it’s these priority settings that prevent them from doing so.
All the hustles and bustles of the world, benefit dominates! There is nothing wrong in chasing profits, however, a bottom line should exist! When more investors understand the truth of “funding”, they will certainly make rational decisions. This is why 58COIN, the first exchange that launched the perpetual contract, completely abandoned the “funding” since the beginning. Ironically, we are the only perpetual contract platform that called off “funding”.