By

1. By – Understanding Basis and Funding Rates in Crypto Futures

Introduction

The concept of "By" in crypto futures trading, often referred to as the basis, is a crucial element for understanding how futures contracts are priced and how funding rates are determined. While seemingly simple, a firm grasp of "By" is essential for profitability, particularly for those engaging in strategies like Arbitrage, Carry Trading, and sophisticated risk management. This article provides a comprehensive, beginner-friendly guide to understanding "By" in the context of crypto futures, covering its calculation, influencing factors, its relationship to funding rates, and practical implications for traders.

What is "By"?

"By" represents the difference between the price of a crypto futures contract and the spot price of the underlying cryptocurrency. It's expressed as a percentage and is a critical indicator of market sentiment and arbitrage opportunities. More formally, it’s calculated as:

By = (Futures Price - Spot Price) / Spot Price x 100%

A positive “By” indicates a *premium*, meaning the futures contract is trading at a higher price than the spot market. Conversely, a negative “By” indicates a *discount*, meaning the futures contract is trading at a lower price than the spot market.

For example:

• If Bitcoin is trading at $60,000 in the spot market and the September futures contract is trading at $60,300, the “By” is ((60,300 - 60,000) / 60,000) * 100% = 0.5%. This is a 0.5% premium.
• If Bitcoin is trading at $60,000 in the spot market and the September futures contract is trading at $59,700, the “By” is ((59,700 - 60,000) / 60,000) * 100% = -0.5%. This is a 0.5% discount.

Factors Influencing "By"

Several factors contribute to the “By” of a crypto futures contract. Understanding these factors is vital for predicting market movements and identifying potential trading opportunities.

• **Interest Rates:** Traditional finance principles dictate that futures prices should reflect the cost of carry, which includes interest rates. In the crypto world, this translates to the opportunity cost of holding the underlying asset versus holding the futures contract. Higher interest rates generally lead to a more negative “By” as investors prefer holding yield-bearing assets.
• **Supply and Demand:** Basic economic principles apply. High demand for the futures contract relative to the spot market will drive up the futures price, creating a positive “By”. Conversely, low demand leads to a negative “By”. This is often linked to speculation and market sentiment.
• **Market Sentiment:** Strong bullish sentiment often leads to a positive “By” as traders are willing to pay a premium to secure future exposure to the asset. Bearish sentiment can cause a negative “By”. Technical Analysis can help gauge market sentiment.
• **Exchange-Specific Factors:** Different exchanges may have varying levels of liquidity, trading fees, and delivery mechanisms, all of which can affect the “By”.
• **Time to Expiry:** As the expiry date of the futures contract approaches, the “By” tends to converge towards zero. This is because the futures contract’s price will increasingly align with the spot price.
• **Borrowing and Lending Rates:** The ease and cost of borrowing cryptocurrency to short sell or lending cryptocurrency to cover short positions influence the “By”. High borrowing costs can increase the premium.
• **Regulatory Uncertainty:** News regarding regulation can impact both the spot and futures markets, causing fluctuations in “By”.

"By" and Funding Rates

The “By” is directly linked to Funding Rates, a mechanism used by perpetual futures exchanges to keep the futures price anchored to the spot price. Funding rates are periodic payments exchanged between traders holding long and short positions.

• **Positive "By":** When the “By” is positive, long positions pay short positions a funding rate. This incentivizes traders to short the futures contract and buy the spot asset, which reduces the futures price and brings it closer to the spot price, decreasing the “By”.
• **Negative "By":** When the “By” is negative, short positions pay long positions a funding rate. This incentivizes traders to long the futures contract and sell the spot asset, increasing the futures price and bringing it closer to the spot price, decreasing the “By”.

The funding rate is typically calculated based on the “By” and a predetermined funding rate interval (e.g., every 8 hours). The exact formula varies between exchanges, but the core principle remains the same: to eliminate arbitrage opportunities created by a sustained difference between the futures and spot prices. Detailed understanding of Perpetual Swaps is crucial here.

Implications for Traders

Understanding “By” and funding rates has significant implications for traders:

• **Arbitrage Opportunities:** Significant discrepancies between the futures and spot prices present arbitrage opportunities. Traders can simultaneously buy the cheaper asset and sell the more expensive one to profit from the price difference. Statistical Arbitrage relies heavily on understanding these discrepancies.
• **Carry Trading:** Traders can engage in carry trade strategies by going long on the asset with a lower cost of carry (usually a negative “By” and a positive funding rate) and shorting the asset with a higher cost of carry (usually a positive “By” and a negative funding rate).
• **Risk Management:** Monitoring the “By” can help traders assess market risk. A consistently high positive “By” may indicate an overbought market susceptible to a correction. A consistently negative “By” may indicate an oversold market.
• **Funding Rate Prediction:** Analyzing the factors influencing “By” can help traders predict future funding rates and adjust their positions accordingly. Time Series Analysis can be useful here.
• **Position Adjustments:** Traders can adjust their positions to benefit from funding rate payments. For example, if the “By” is consistently positive, a trader might choose to hold a short position to receive funding rate payments.

Comparing "By" Across Exchanges

The "By" can vary significantly between different crypto futures exchanges due to differences in liquidity, trading volume, and user base. This creates opportunities for cross-exchange arbitrage.

Exchange	Asset	"By" (as of Oct 26, 2023)	Funding Rate (8h)
Binance	BTC	0.75%	0.0125%	Bybit	BTC	0.50%	0.0075%	OKX	BTC	0.60%	0.0090%

This table illustrates hypothetical "By" and funding rate differences. Actual values fluctuate constantly.

Exchange	Asset	Open Interest (USD)	Trading Volume (24h USD)
Binance	ETH	$5.2B	$18.5B	Bybit	ETH	$2.1B	$7.8B	OKX	ETH	$3.5B	$12.5B

Higher Open Interest and Trading Volume generally indicate more efficient price discovery and smaller deviations in "By".

Strategy	"By" Condition	Action
Arbitrage	Positive "By"	Short Futures, Long Spot	Arbitrage	Negative "By"	Long Futures, Short Spot	Carry Trade	Negative "By" (and positive funding)	Long Futures	Hedging	High Positive "By"	Consider reducing long exposure

Advanced Considerations

• **Contango vs. Backwardation:** A persistent positive “By” is known as *contango*, where futures prices are higher than spot prices. This is typical in markets where storage costs or interest rates are significant. A persistent negative “By” is known as *backwardation*, where futures prices are lower than spot prices. This often occurs when there’s immediate demand for the underlying asset.
• **Basis Trading:** A specialized trading strategy that seeks to profit from the convergence of the futures price to the spot price. Basis Trading Strategies require sophisticated modeling and risk management.
• **Volatility Skew:** The “By” can also vary depending on the expiry date of the futures contract. A steeper “By” curve (where longer-dated contracts have a higher “By”) indicates higher expected volatility in the future.
• **Liquidity Impact:** Large trades can temporarily impact the “By” and funding rates. Traders should be aware of this potential influence, particularly when executing large orders.
• **Correlation with Spot Market Volatility:** The "By" often exhibits a correlation with spot market volatility. During periods of high volatility, the "By" may widen as traders demand a higher premium for future exposure. Volatility Trading can capitalize on these relationships.

Resources for Monitoring "By" and Funding Rates

• **Exchange APIs:** Most crypto futures exchanges provide APIs that allow traders to programmatically access real-time “By” and funding rate data.
• **TradingView:** TradingView offers tools for visualizing “By” and funding rates on charts.
• **Dedicated Crypto Data Platforms:** Platforms like Glassnode and CoinGlass provide advanced analytics and data on “By” and funding rates.
• **Cryptocurrency News and Analysis Websites:** Stay informed about market trends and factors influencing the “By” through reputable news sources. Crypto News Aggregators can be helpful.

Conclusion

Understanding “By” is fundamental for successful crypto futures trading. By grasping its calculation, influencing factors, and relationship to funding rates, traders can identify arbitrage opportunities, implement carry trade strategies, manage risk effectively, and ultimately improve their profitability. Continual monitoring and analysis of the “By” are essential in the dynamic world of crypto futures. Further exploration of Order Book Analysis, Market Depth Analysis, and Liquidity Analysis will also enhance your trading capabilities. Remember to always practice proper Risk Management techniques when trading crypto futures.

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