What are Perpetual Swaps
Perpetual Swaps are derivatives trading instruments. Similar to futures contracts, they have an underlying asset, and allows traders to be exposed to an asset without holding the asset itself. The merit of being exposed to an asset was previously popular with futures contracts, but there is a disadvantage in having a futures contracts in that they would have an expiry date.
Perpetual Swaps are unique because they do not expire. It is almost comparable to say that they are a super-short-term futures contracts (1h or 8h) without expiry dates. To ensure that the price of a swap does not sway too far away from the underlying asset, they have a mechanism called “funding” built into them as an incentives structure.
Funding and Funding Rate
Funding occurs when traders holding a long or a short position exchange their fees:
- When funding is positive, traders with long positions pay to traders with short positions.
- When funding is negative, traders with short positions pay to traders with long positions.
The rate itself is calculated based on how much open interest there is. If there are too many long positions, the rate would be positive. If there are too many short positions open, the rate would be negative.
The timing at which these payments happen are determined by exchanges themselves, and exchanges have their own rules and there seem to be no standard around it. FTX funds their traders hourly, while others fund 3 times a day starting at 00:00 UTC.
It is important to be aware of when these fundings occurs, because you risk getting liquidated even if the price is not volatile.
Suppose you had a large long position open, but the price has not moved much. You would have to pay funding on that, whcih would be subtracted from your balance, which then would affect the margin percentage you are required to keep in your account. If your margin falls under, your position will be liquidated. Don’t get liquidated - it really sucks.
Tracking Funding Time
Being aware of when thes fundings happen is vital, however, I could not find any good tools to set up reminders to track when Perpetual Swap Funding occurs, so I wrote a simple script to generate a calendar which you could subscribe to with your own Google Calendar.
It currently supports the following exchanges: Binance, Bitmex, FTX, OkEx. Feel free to send a PR if you would like to add others.