How to earn money with crypto part 1: Perpetual Funding

Secondary Market explained

The secondary market is also named ‘future market’ or synthetic market. In the secondary market, you are simply buying or selling contracts that take on or represent the value of a specific cryptocurrency. 

When you buy a futures contract, you don’t own the underlying cryptocurrency. Instead, you’re said to own a specific contract with an agreement to purchase and sell cryptocurrency at a future date. So, ownership of a futures contract doesn’t reward you with any economic benefits such as voting and staking. And on the secondary market, no real assets are being traded but contracts that refer to a real asset. For instance, on the BTCUSD-PREP on FTX: 1 contract is equal to 1 USD. 

Secondary market or futures contracts are known to offer absolute protection against all forms of volatility and adverse price fluctuations on their underlying asset. It’s also known as a proxy tool for traders to speculate on the future prices of a specific cryptocurrency. 

With secondary market or futures contracts, you can take the added advantage of price volatility and profit from price fluctuations. Regardless of price rise or fall, the secondary market enables you to participate in a cryptocurrency’s movements with ease. 

In essence, you can speculate on cryptocurrency’s price rather than purchasing the underlying asset itself. 

And if you expect the value of an asset to rise, you’ll buy a futures contract to go long, and if you expect to get a fall, then you’ll sell to go short. So your profit and loss would wholly depend on the result of your prediction. 

So, here are some key points to get acquainted with; 

  •  – The secondary market is named ‘future market’ or synthetic market. 
  •  – No real assets are being traded on the secondary market but contracts that refer to a real asset. For instance, on BTCUSD-PERP on FTX: 1 contract equals 1 USD. 
  •  – It allows traders to bet on a market without having the asset. 
  •  – This enables a lot more liquidity than the primary market and also leverages possibilities. 

What is Funding on perpetual markets? 

Perpetual funding, also called Perpetual contracts, is known to copy a margin-based spot market and trade close to the underlying reference index price. In essence, unlike the conventional futures, perpetual funds are often traded at a somewhat equal price or quite similar to spot markets. Nonetheless, during extreme market conditions, the stipulated price may spiral away from the spot market cost/price. 

Nonetheless, the huge difference between traditional futures and perpetual contracts is simply the settlement date of traditional futures. 

Keynotes: 

  •  – On a perpetual market, to be as close as possible to the primary market, a funding fee mechanism is known to occur multiple times in a day (from 3 to 24 times in a day, depending on the exchanges). 
  •  – The funding fee is predictable (the exchange shows it); therefore, it’s possible to make money out of it. However, to make the strategy risk-free, you’ll have to make the opposite trade on the primary market. 

Perpetual Funding Trading Explained

This is a special kind of futures contract, but it’s unlike the traditional form of futures; it doesn’t have an expiry date in any way. 

So, you can hold a position for as long as you wish. However, the trading of perpetual contracts is based on an underlying index price. According to major spot markets and their relative trading flow, the index price comprises an average price of an asset. 

Unlike the conventional future contract, perpetual contracts are often traded at a price equal to or very similar to spot markets. Nonetheless, during extreme market conditions, the marked price may change from the spot market price. 

And still, the large difference between the conventional futures and perpetual contracts is the ‘settlement date’ of the former. 

The Funding Fee 

 

Points to note

The funding fee is predictable (the exchange shows it); therefore, it is possible to make money. However, to make the strategy risk-free, you’ll have to make the opposite trade on the primary market.  Here’s an example; 

Market BTCUSD perpetual on BitMEX

The next funding fee or rate is 0.1% (meaning longs position will pay net 0.1% of their position to the shorts) 

Strategy used; 

  •  – Buy 10’000$ BTC on the primary market
  •  – At the same time, sell 10’000 contracts on BTCUSD perpetual market 
  •  – When the funding rate or fee occurs, you will receive 10’000*1=100 contracts 
  •  – Reverse both positions to net a 100$ income

The funding comprises regular payments between buyers and sellers and according to the current funding rate. When the funding rate is positive, long traders (contract buyers) have to pay the short (contract sellers) ones. In stark contrast, a negative funding rate or fee means that short positions pay longs. The funding rate or fee is based on two parts: the premium and the interest rate. 

Best place to do the perpetual funding trading 

FTX 

FTX logo
  • Credit card/Debit card
  • Up to 101x leverage
  • Move contracts
 

FTX is a great place to do the perpetual funding trade, as it is a complete platform for both primary and secondary markets. With great liquidity for BTC and a large choice of altcoins to do the trade.

BitMex 

10% Fee Discount
BitMex logo
  • Cryptocurrency
  • Up to 100x leverage
 

Bitmex has been historically the best platform to operate on secondary markets since it was the first one to be created in 2014. Until now it has built a great reputation over the years and is a great choice for those who are looking for good liquidity for BTC and few major altcoins.

Binance 

Best for Altcoins
Binance logo
  • Credit Card
  • Cryptocurrency
  • Bank transfer (sepa)
 

Binance is the leader on trading volume for both primary and secondary markets. It is also the platform offering the biggest choice of different altcoins. Moreover, as Binance offers a lot more services, it will be the best choice for those who want to centralize their trading activities.

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Written by:  Narender Charan

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