About the Funding Cost

1. Funding Cost Introduction

The funding cost, also known as the funding fee, is the core operating mechanism of perpetual contracts on cryptocurrency trading platforms. Unlike traditional futures contracts that have an expiration date, perpetual contracts allow traders to hold positions indefinitely. To maintain this flexibility, the funding mechanism plays a crucial role in ensuring market stability.

The primary purpose of the funding fee is to ensure that the transaction price of the perpetual contract closely follows the underlying reference price (also known as the spot price or index price). This is achieved through regular exchanges of funding fees between long and short position holders. When the perpetual contract price is higher than the spot price, long position holders pay funding fees to short position holders, creating an incentive to sell and bringing the price back down. Conversely, when the perpetual contract price is lower than the spot price, short position holders pay funding fees to long position holders, encouraging buying pressure to push the price up.

This mechanism creates a natural balancing force that keeps the perpetual contract price anchored to the underlying asset's spot price, preventing significant and sustained deviations between the two markets. The funding rate can be positive or negative depending on market conditions, and it adjusts dynamically based on the price difference between the perpetual contract and the spot market.

2. Explanation of Expenses

Fee Collection Mechanism

1. Platform Fee Policy: The platform does not charge any funding fees as a service fee. Instead, funding fees are exchanged directly between users holding opposite positions. This means that the fees collected from one side of the market are distributed to the other side, with the platform acting only as an intermediary to facilitate this transfer.

2. Settlement Schedule: Funding fees are generated and settled every 8 hours at specific times: 07:00, 15:00, and 23:00 (UTC+08:00). It is important to note that you only need to pay or receive funding fees if you hold an open position at these exact settlement times. If you close your position before a settlement time, you will not be involved in that particular funding fee exchange. This creates an opportunity for short-term traders to avoid funding fees by timing their trades around these settlement periods.

3. Deduction and Payment Process: When funding fees are collected, they are deducted from the fixed margin allocated to your position, not from your available balance. The system has built-in protections to prevent liquidation due to funding fee deductions. Specifically, the maximum amount that can be deducted is limited such that your margin rate remains above the maintenance margin rate with a certain safety buffer. This ensures that funding fee deductions alone cannot cause your position to be liquidated.

   The actual funding fee amount you receive also depends on the total amount successfully deducted from counterparty accounts. If counterparties have insufficient margin to pay the full funding fee, the distributed amount may be proportionally reduced.

Special Considerations for High Leverage Positions

For positions using relatively high leverage, the system implements additional protective measures. At certain settlement points, if your position's margin level is close to the maintenance requirement, the system may waive the funding fee collection to prevent unnecessary liquidation risk. This protective mechanism ensures that high-leverage traders are not unfairly penalized by funding fee obligations when their positions are already under margin pressure.

Practical Implications for Traders

Understanding the funding cost mechanism is essential for effective position management:

• Long-term holders should monitor funding rates, as consistently paying funding fees can significantly impact profitability over time
• Short-term traders can time their entries and exits around settlement times to avoid funding fee obligations
• Market makers and arbitrageurs can potentially profit from funding rate arbitrage opportunities
• Risk managers should factor funding costs into their overall position cost calculations and risk assessments

By understanding how funding fees work, traders can make more informed decisions about position sizing, holding periods, and overall trading strategies in the perpetual contract market.

FAQ

What is Funding Cost? What does it include?

Funding cost is the fee paid by users to acquire capital, comprising two parts: financing expenses and capital usage fees. It includes transaction fees, interest charges, and broker commissions incurred during the financing process to support operations and expansion.

How to calculate a company's weighted average cost of capital (WACC)?

WACC = (E/V × Re) + (D/V × Rd × (1-Tc)). Determine the cost of debt and equity, weight them by their proportion in total capital value, then sum them together for the company's overall capital cost.

What are the main factors affecting financing costs?

Main factors include market interest rates, credit ratings, transaction volume, market volatility, and economic conditions. Higher interest rates and lower credit ratings increase financing costs significantly.

How can enterprises reduce financing costs?

Enterprises can lower financing costs by optimizing credit assets, improving creditworthiness ratings, diversifying funding channels, strengthening financial controls, and leveraging decentralized finance solutions for more efficient capital allocation.

What is the difference between financing cost and capital cost?

Financing cost refers to the expenses incurred during fundraising, such as interest and fees. Capital cost represents the required return rate investors expect on their invested capital. Financing cost is a short-term expense, while capital cost reflects long-term investment returns.

What are the cost differences between different financing methods (debt financing, equity financing, etc.)?

Debt financing typically costs less than equity financing due to lower risk and lower return expectations. Equity financing dilutes ownership stakes and increases financing costs. Debt financing is generally more economical for companies seeking capital.