How Do Interest Rates Affect Cryptocurrency – An important feature of traditional futures contracts is the expiration date. When the contract ends, a process called liquidation begins.
Conventional futures contracts are usually monthly or quarterly. In a contract, the contract price is tied to the spot price and all open positions are closed.
How Do Interest Rates Affect Cryptocurrency
Crypto derivatives exchanges offer long-term contracts and are designed similarly to traditional futures. The eternal covenant, however, presents a significant difference.
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Unlike traditional futures, traders can hold positions without an expiration date and do not have to track months of delivery. For example, a trader can hold a long-term short position unless it breaks down. As a result, long-term trading contracts are similar to trading pairs in the spot market.
Because futures are not fixed in the traditional way, the exchange needs a system to ensure that the price of the future and the price of the index are constantly linked. This mechanism is also called the funding ratio.
A fee is a regular payment to the seller that is long or short based on the difference between the long contract and the market. Therefore, depending on the open position, the seller pays or receives financing.
Cryptocurrency funding rates prevent long-term differences between the prices of the two markets. This is repeated several times a day: Futures do this every eight hours.
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In the future, the funding rate (highlighted in red) and the next funding count (highlighted in yellow) are as follows:
For futures, the interest rate is set at 0.03% per day (0.01% per funding interval), except for contracts such as BNBUSDT and BNBBUSD, which are 0%. At the same time, the premium varies depending on the price difference between the long-term contract and the price of the brand.
During periods of fluctuating weather, prices may differ between long-term contracts and brand prices. In these cases, the premium is increased or decreased accordingly.
A large spread equals a large premium. Conversely, a low price indicates a narrow gap between two prices.
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When the financing rate is good, the price of the long-term contract is usually higher than the mark-up price. Therefore, traders who are long pay short positions. Conversely, a negative funding ratio means that a short position pays for a long position.
Fees are paid peer-to-peer. Therefore, it does not require a commission on the fee, because it happens directly to the user.
Because the funding calculation takes into account the amount of leverage used, the funding ratio can have a significant impact on profits and losses. With high leverage, paying traders can experience losses and be liquidated even in low volatility markets.
Traders can develop trading strategies to take advantage of the leverage ratio and profit even in low volatility markets.
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In general, the financing rate is designed to encourage the seller to take a position that keeps the contract price in line with the market.
Historically, the rate of cryptocurrency funding has often been correlated with the general trend of the underlying asset. Correlation does not say that the rate of interest dictates the market rate, but rather the opposite. The chart below shows the relationship between the funding rate and the BTC spot price over a 30-day period:
As can be seen in Table 1, the funding rate has decreased as the BTC price has retreated since the end of 2021. A high funding rate is a sign of the market’s confidence in of greater growth. However, many traders have noticed an increase in fees, which has helped align the futures price with the price level.
Nine major exchanges currently offer contracts for an indefinite period of time. Traders generally prefer platforms that offer the lowest financing rates because this can have a significant impact on profits and losses. Here’s a quick comparison of Bitcoin futures funding rates on major exchanges:
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In general, the financing rate for major exchanges is -0.007%. As mentioned earlier, these fees vary based on changes in property prices.
According to Glassnode, historical futures funding rates are lower than the industry average, averaging 0.0094%. For example, the seller will pay $ 9.4 for a future position of $ 100,000, while the financing rate can be 10-20% higher in other sectors.
One of the main reasons why futures have been able to maintain low funding rates is the ease of arbitrage between the spot and futures markets.
Cryptocurrencies never sleep. Therefore, there is always an arbitrage opportunity. Futures allow traders to easily and quickly switch between the spot and futures markets, allowing them to take advantage of these opportunities.
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The failure between the long-term contract and the brand price is therefore estimated, resulting in a difference between the two prices. Although volatility can cause occasional spikes in funding rates, arbitrageurs take advantage of these opportunities. Funding rates will therefore return to their average value.
Funding rates are higher than other exchanges which limit arbitrage. This is due to the forced transition between the spot and futures markets. For example, some exchanges limit the number of transfers that can be made per day.
Cryptocurrency trading fees play an important role in the futures market forever. Most crypto derivatives exchanges use a hedging system to keep the price of the contract in line with the index. These rates change as property prices rise or fall and are determined by market forces.
Additionally, cryptocurrency funding rates vary between exchanges; on some exchanges these rates remain high. In contrast, others, such as futures, maintain low financing rates. This is due to the difference in the trading platform between the exchanges. In an exchange that allows a smooth transition between the spot and futures markets, arbitrage is easier for traders. Failures are eliminated as quickly as possible. Bitcoin (BTC) is a cryptocurrency developed by Satoshi Nakamoto in 2009, named after an unknown creator (or creators). Transactions are recorded in the blockchain, which records the history of each unit and proves its ownership.
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Unlike traditional currencies, Bitcoin is not issued by a central bank or backed by a government. For investors, buying bitcoin is not the same as buying stocks or bonds because bitcoin is not a business. As a result, there are no company balance sheets or 10,000 forms to review or financial returns to compare.
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Bitcoin is not issued by a central bank or backed by a government; Therefore, monetary policy tools, inflation rates, and economic growth rates that often affect the value of a currency do not apply to Bitcoin. Bitcoin acts as a commodity that is often used to store its value, so the following factors affect its price:
Asset supply plays an important role in determining prices. A rare property may command a high price, while an abundant property will command a low price. The supply of bitcoins is generally well distributed, as only 21 million will be issued and only a specific amount will be created each year. Their protocol allows new bitcoins to be rewarded at a fixed rate, and this rate is designed to decrease over time.
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Bitcoin’s reward rate decreases approximately every four years. This is called a halving, where the amount of money given as a reward for mining is reduced by half, which was last in May 2020.
Therefore, the supply of Bitcoin decreases in the future, which increases the demand. It is as if the crop is cut every four years to the point where it can no longer be harvested, and it has been publicly announced that it will happen: the price of rice will rise.
Bitcoin has attracted the attention of retail and institutional investors, increasing demand fueled by increased information, investment by “experts” and business owners promoting the value that bitcoin has and he will get it. Bitcoin has also become popular in countries with high inflation and stagnant currencies, such as Venezuela. It is also popular among those who use it to transfer large sums of money for illegal and illegal activities.
This means that the reduction in supply in the future was accompanied by an increase in demand, which caused an increase in the price of Bitcoin. However, prices still fluctuate during boom and bust periods. For example, the rise in the price of bitcoin in 2017 was followed by a long trough, then spikes and two troughs until 2021.
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Like other commodities, the cost of production plays an important role in determining the price of Bitcoin. According to some research, the price of Bitcoin in the crypto market is closely related to the cost of production.
In the case of Bitcoin, the cost of production is in the sum of the cost of the infrastructure and the electricity needed to mine the cryptocurrency and the indirect cost related to the level of complexity of the algorithm. Bitcoin mining involves a network of miners competing to unlock the stored number: the first miner to do so is rewarded with the newly mined bitcoins and all transaction fees collected since the last block was found.
The indirect cost of Bitcoin mining is the level of complexity of the algorithm. Different levels of complexity in Bitcoin algorithms can speed up or slow down the production rate of Bitcoins and affect the global supply, thus affecting the price.
Solve the hash to unlock block a