Spilling the Tea on Funding Fees…

People often ask me whether or not it’s wise to hold leveraged positions long term on perp contracts when perp contracts attract fee’s every 8 hours. We usually recommend people who want to hold long term leveraged trades open them on futures contracts with an expiry date in the future as these incur less fees. However, as restrictions keep getting tighter and tighter around the world (governments don’t want us getting rich now) many traders are losing the option to be able to trade futures.

So I decided to do a long term trade test on a perp contract to document my results and really work out whether or not it’s actually that bad to hold long term positions on perp contracts. I have just closed a perp trade which I held for 2 months (you read that right!) and so I wanted to document my results and my learnings in order to answer this question.

UNDERSTANDING FUNDING FEES

The exchange that I used to take this trade was Bitunix and this part of my results are very important. You see, all exchanges charge fees for opening and closing leveraged trades and they also have another fee called a “funding rate”. The funding rate is calculated and charged usually every 8-hours, although in the FTX days they would charge every hour which is why I never touched that exchange and praise the Crypto Gods for that!

In addition to this, some exchanges only charge the funding rate to one side (longs or shorts), whereas others will charge one side and pay the other. If you are trading on an exchange that pays out one side, this can heavily work in your favour because it means sometimes you’re paying, other times you’re getting paid. If the exchange only charges the funding rate, then it’s nothing but added costs for you.

Often the side getting paid will be the side going against the trend, this is to help the exchange balance the positions. So this is why trading on an exchange that PAYS you when you’re technically on the wrong side of the trend (according to everyone else but in the TBD System, you’re just ahead of them!), can actually increase your profits as opposed to costing you in fees.

To know who’s getting paid throughout your trade, you can go to the funding rate countdown which is usually at the top of the futures trading page on any exchange, and usually if the funding rate is negative shorts are paying longs and if it’s positive longs are paying shorts.

Do I think you need to track this every day and make trading decisions based on this? No, not really. But checking in every now and then on long term positions will ensure the fee’s aren’t eating too much into your profits. You can usually check the fees per trade in your transaction history on most exchanges. This should show even if your trade is still open.

PERPETUAL VS FUTURES CONTRACTS

Let’s discuss the difference between perpetual contracts and futures contracts for those that may not know.

Perpetual contracts are the most commonly used type of leverage trading options. They tend to have the best liquidity which means on market buys, you’re going to get the best entry and exit prices. The only disadvantage with Perpetual Contracts is that this type of trading incurs more and more fees the longer you hold the trade. This is because you have the cost to enter, the cost to exit plus the funding fee every 8-hours for as long as you have an open trade, as explained earlier.

Futures contracts are different because these contracts do not have the 8-hour funding fee. Instead, they have an interest rate built into the price. This saves you in funding fees for the types of trades that you hold for a really long time. The disadvantage with futures contracts is they have an expiry date and if you don’t exit your trade prior to the expiry date, your trade will close at expiry on your behalf. They also tend to have lower liquidity so getting a fill on your position can take more time and market buys tend to cause slippage.

The image below shows you the price of Bitcoin as a Perp Contract as opposed to the Futures contracts with different expiry dates on the OKX exchange. This price doesn’t really matter, the percentage moves should be around the same and therefore your % profit per trade should also work out roughly the same.

THE RESULT!

So let’s get to the result. The trade in question was opened on the 7th June, 2024 and closed on the 5th August, 2024. Basically 2 months but 60 days to be exact.

Let me tell you I was shocked by the results…. Read on!

So here’s basically what happened… As I mentioned, I took this trade on Bitunix because Bitunix is an exchange that pays both sides. Now because I trade the TBD System (the best trading system in the world just in case you weren’t aware!), that meant that I was in very early before most retail traders believed the trend was changing.

For the first 18 days of this trade I was actually PAID the funding fee. In fact, the very first day’s funding fee payout covered my costs for opening the trade. So at this point, it was actually a 100% free trade. I did not pay funding fees until day 19 but by that time I had already made 16 times my cost to enter just in funding rate payments as pure profit (this doesn’t include the profit on my trade, it’s fees only).

In total, over the 60 days I had this trade open, here were my results:
Days I got paid the funding rate = 47
Days I paid the funding rate = 13
Amount of times I took partial profit = once (there’s is a fee to partially close as well)

This chart shows in green boxes the days I got paid the funding rates. Days outside of the green boxes are days I paid for it. It’s important to note that this trade was a profitable trade from day one. At no point did this trade go back above my short entry. I think this is important to mention because sometimes people hold onto trades that are in a drawdown for the purpose of funding fees and I think this is not wise.

This chart really goes to show retail traders really do jump on the trend at level three when it’s too late because it was only then I actually started to consistently pay the funding fees.

In conclusion, I actually ended up making money in fees on this trade, totally separate to my profits on this trade. If we minus my cost to enter, my cost to exit and the cost to take partial profit then in the end I made 19 times my total costs to enter and exit this trade as pure profit, separate to the profit that came from actually making a good trading decision.

KEY TAKEAWAYS

Here’s what I learned from this experiment:

• Fee’s aren’t something you need to be afraid of but they’re something you can capitalise on if you understand the game
• Make sure you’re trading on an exchange that pays out the funding rates
• The reason I made profit on fees is because I can identify a trend change before most people and those initial days are crucial to making the most profit possible in fees (I made the biggest profits in fees on the first 18 days)
• Holding onto bad trades for the sake of earning funding fees will go against you. Cut bad trades early, learn to identify key pivots with precision (the TBD System is good for that)
• If you take partial profit along the way, this dramatically reduces what you’re going to be paid in funding rate. My daily payouts dropped to less than half after my first TP (makes sense) so maybe grow some courage and just move SL’s instead of taking partial profits if you want to maximise this.

I couldn’t be happier with my experience trading on Bitunix and after my little experiment with their fees, I’m an even bigger fan!

Boost your profits even further and get a 25% Trading Fee Rebate for life with Bitunix when you join using this link: https://bit.ly/Bitunix_25