Since a lot of traders still somehow don't understand Bitmex's perpetual swap contracts and how funding works, will do a quick thread on this..
Bitmex's XBTUSD is a derivative product, designed to replicate spot BTC, but with the ability to use massive leverage. Unlike futures, it's intended to not have a basis (difference between a derivative and spot), and this is accomplished via the funding mechanism.
Every 8 hours, a funding fee is charged on each open position -- This is not a fee paid to Bitmex, it's peer to peer, longs pay shorts, or shorts pay longs. Why does this happen?
Funding is used to incentive the market to have more buy or sell-side pressure, and thus force the price to revert back to the underlying spot price. The rate is calculated by the difference between the XBTUSD price vs. the 'Mark Price' (Gdax + Bitstamp's price averaged).
It's NOT calculated by the amount of longs vs. shorts -- This is a nonsensical concept that traders frequently confuse because of the way Bitfinex works.
Bitmex's contract is P2P -- For every long, there must be a short, for every sell there must be a buy. Each position is 1:1. Funding is not indicative of which side has more positions open, it's entirely about the premium/discount that XBTUSD develops.
Funding also creates an interesting dynamic between swaps and futures -- In a bull market, people want to long Bitcoin more than short. XBTUSD typically will develop a premium compared to spot, and the funding rate will aggressively be in favor of shorts.
At the same time, futures will then develop a premium as traders want to long without paying funding. This creates various arbitrage trades one could take.
For more on the relationship between various contracts, check this thread about hedging:
While funding was initially more meaningful when Bitmex's volume was lower than spot volume, it's much less relevant now since Bitmex volume outmatches spot markets. Bitmex now also occasionally leads in price, as compared to when spot always was the main driver.
Still, it's something to keep in mind in terms of market dynamics, and all traders should understand the instruments they are using. I'm astounded by how little time people invest into learning about more than just TA/PA.
