What Are Bybit Funding Fees?

Perpetual contract trading is similar to futures contracts, whereby traders can leverage up and don’t exchange the underlying assets on the spot. The main difference between the two is that a perpetual contract has no expiration date, which means that traders can hold the contract (technically forever). Without a fixed delivery date, the contract price and spot price may never converge.

In order to anchor the perpetual contract trading price to the spot price, the funding mechanism is to ensure Bybit’s last traded price is always anchored to global standard spot prices. Here’s a brief overview of how it works: Should the trading price sit above the spot price, long position holders will pay the funding fees to short position holders. This incentivizes traders to open more short positions and brings down trading prices, shifting toward the spot price.

Let's say the trading price is lower than the spot price. In this case, short position holders will pay the funding fees to long position holders, so that the latter is placed in the driver’s seat to open more positions. Thus, prices are driven up, achieving a similar objective to narrowing the spread.

How Does the Funding Mechanism Work?

On Bybit's trading platform, the funding fee for USDT Perpetual Contracts and Inverse Perpetual Contracts will be settled immediately based on the rate derived from the current funding interval. The funding rate calculated between 12AM UTC (midnight) and 8AM UTC will be used to derive your funding fees at 8AM UTC.

Bybit's funding fee will be incurred every 8 hours. However, every trading symbol will have its funding time interval. Bybit may adjust the funding time interval based on the live market situation when there is a significant price gap between the Last Traded Price and Mark Price.

Do take note that the exchange does not collect the funding fees. Instead, they are exchanged between the long and short positions. If the funding rate is positive, long position holders will pay trading fees to short position holders. Alternatively, if the funding rate is negative, short position holders will end up paying trading fees to long position holders.

How to Calculate the Funding Fee

The formula for calculating the funding fee is as follows:

Position Value = Quantity of Contract/Mark Price

Funding Rate = Premium Index (P) + Clamp [Interest Rate (I) − Premium Index (P), 0.05%, −0.05%]

Funding Fee = Position Value × Funding Rate

Find out more about Bybit’s funding rate calculation here. 

Example:

Trader A holds a long position of 20,000 BTCUSD inverse contracts and the Mark Price is 18,000 USD at the funding timestamp with the current funding rate at 0.01%.

First, let’s calculate the Position Value:

Position Value = 20,000/8,000 = 2.5 BTC

With the Position Value, let’s calculate the Funding Fee:

Funding Fee = 2.5 BTC × 0.01% = 0.00025 BTC

As the funding rate is positive (0.01%), the long position holders have to pay the short position holders. Hence, Trader A has to pay a funding fee of 0.00025 BTC and a short position holder with the same quantity of contracts will receive 0.00025 BTC.

How to Make Profits From the Funding Fee

According to Bybit’s funding history, the year-to-date (August 2, 2020) funding rate is displayed in the figure below:

As you’ll notice, BTC has finally broken the $10,500 resistance on July 27. Since then, the price has continued to skyrocket, setting an annual high of $12,000 on August 2. This results in high trading price premiums and thus, high funding rates. On August 2, Bybit’s BTCUSD contract funding rate has peaked at 0.1171%. If you’ve held short positions on perpetual contracts while going long in spot, you will have earned a substantial amount of funding fees without much market risk. 

During the dip in early March 2022, the trading price of perpetual contracts was significantly discounted compared to the spot price. The funding rate plummeted to −0.375%. Therefore, if you chose to go long in the perpetual contracts market and hedged it by short positions in the spot market during that period, you will also have earned a sizable amount in funding fees.

How to Check the Funding Rate

On the Bybit platform, traders can view both the funding rate and predicted rate in the Contract Details column.

Taking the image above as an example, at 8:00AM (UTC) on June 22, 2022, the most updated funding rate is 0.01%. This means long position holders are required to pay short position holders a funding fee of 0.01% at 8:00AM UTC based on the selected contract, in this case, the BTCUSDT Perpetual Contract.

For example: 

Trader A holds a long position of 10 BTC contracts, and the mark price is 18,000 USDT at the funding timestamp, with the current funding rate at 0.01%.

First, let’s calculate the Position Value:

Position Value = 10 × 18,000 = 180,000 USDT

With the Position Value, let’s calculate the Funding Fee:

Funding Fee = 180,000 × 0.01% = 18 USDT

As the funding rate is positive (0.01%), the long position holders have to pay the short position holders. Hence, Trader A has to pay a funding fee of 18 USDT, and a short position holder with the same quantity of contracts will receive 18 USDT. 

However, if the funding fee is negative (−0.0013%), short position holders will have to pay long position holders. Thus, using the same example,

Funding Fee = 180,000 × 0.0013% = 2.34 USDT

Trader A will receive 2.34 USDT from the short position holders.

How Much Funding Fee Do I Pay or Receive?

Let’s use a hypothetical scenario. Let’s say that Ann holds a 10,000 BTCUSD long position contract. Assuming that the mark price at the funding settlement time is $11,104.14, the funding rate is 0.0757% (determined at a funding fee settlement time), and the value of Ann’s position is 0.9 BTC (10,000/11,104.14). Therefore, the funding fee will be 0.00068 BTC (0.9 BTC × 0.0757%).

Thus, as a long position holder, Ann will pay a funding fee of 0.00068 BTC at the settlement time.

In a Nutshell

To traders, funding fees serve as an excellent way to make money. Once you've mastered the basics, you can proceed to the next level by trying out the Bybit funding fee arbitrage, which could net you even more profit.