How much is the overnight fee for Upbit contracts

In the cryptocurrency futures market, Overnight Funding Rates (OFRs) incentivize traders to maintain market balance by encouraging funding of positions based on supply and demand dynamics.

Nov 20, 2024 at 10:28 am

Overnight Funding Rates: A Comprehensive Guide to Upbit Contracts

What are Overnight Funding Rates (OFRs)?

In the realm of cryptocurrency futures trading, overnight funding rates (OFRs) play a pivotal role in managing the price deviation between perpetual contracts and their underlying assets. These rates act as an incentive mechanism, encouraging traders to maintain a balanced market by funding long or short positions based on supply and demand dynamics.

How OFRs Work on Upbit Contracts

Upbit, a leading cryptocurrency exchange in South Korea, employs a sophisticated system for calculating OFRs on its contracts. These rates are determined every eight hours and applied to open positions at the settlement time.

• For long positions: If the OFR is positive, long traders pay a funding fee to short traders, and vice versa. This encourages long traders to reduce their positions, stabilizing the market.
• For short positions: If the OFR is negative, short traders receive a funding payment from long traders, incentivizing them to maintain or increase their short positions.

Why are OFRs Important?

OFRs serve multiple important functions within Upbit's contract trading ecosystem:

• Maintaining Price Stability: OFRs help align the prices of perpetual contracts with their underlying assets. When the OFR is positive, it discourages traders from holding excessive long positions, preventing a price bubble. Conversely, a negative OFR encourages traders to increase short positions, limiting price declines.
• Managing Market Volatility: OFRs mitigate excessive market fluctuations by incentivizing traders to adjust their positions based on funding rate signals. Positive OFRs signal a rise in demand for a particular asset or contract, while negative OFRs indicate a decrease.
• Creating Trading Opportunities: Traders can strategically utilize OFRs to profit from funding payments. By taking positions that align with the prevailing OFR, traders can generate income while managing their risk exposure.

How to Calculate OFRs on Upbit Contracts

Upbit's OFR calculation is based on the following formula:

• OFR = (P - F) / (F 8) 100%

Where:

• P = Mark Price of the contract at the settlement time
• F = Index Price of the underlying asset at the settlement time

Example:

• Assume a BTC/USD contract with the following values:

  • Mark Price (P) = $30,100
  • Index Price (F) = $30,000
• OFR = ($30,100 - $30,000) / ($30,000 8) 100% = 0.167%

Negative OFRs on Upbit Contracts

Negative OFRs arise when the demand for long positions on Upbit's contracts outstrips the demand for short positions. This situation encourages traders to maintain or increase their short positions, pushing the contract's price below the index price. Negative OFRs also serve to reduce the incentives for long traders, further stabilizing the market.

Positive OFRs on Upbit Contracts

Positive OFRs occur when the demand for short positions on Upbit's contracts exceeds the demand for long positions. This scenario encourages traders to reduce their long positions or open short positions, pushing the contract's price above the index price. Positive OFRs effectively disincentivize short traders and promote a more balanced market.

Factors Influencing OFRs

Several factors can influence OFRs on Upbit contracts:

• Market Sentiment: Strong market sentiment, such as bullish trends or negative news, can drive OFRs higher or lower.
• Funding Liquidity: Ample funding liquidity encourages active trading and helps stabilize OFRs.
• Exchange Maintenance: Scheduled exchange maintenance or updates can affect OFR calculation and lead to temporary fluctuations.
• Surrounding Market: Macroeconomic news and events in the broader financial markets can also impact OFRs on Upbit contracts.