Difference between Bitcoin [BTC] Funding and Premium Rate
What is Premium?
The Mark Price of a contract is calculated using the interest rates on the Base Currency (XBT or BTC) and the Quote Currency (USD). When the Perpetual contracts are trading at a price higher or lower than the Mark Price, the difference is taken into account as premium or discount.
This forms the Premium Index (PI), a negative premium is termed as a discount.
The premium index and the interest rates to for Mark Price are calculated every minute across exchanges.
What is Funding?
Funding refers to the process of providing leverage/loans to the traders. It works in a similar way to providing short-term loans at a variable rate of interest. This rate is called the funding rate.
The funding rate is usually calculated at intervals when the borrower needs to pay the funding amount (usually 8 to 24 hours). It is taken from the margin account of traders.
The funding rate on BitMEX is calculated by using a formula with two variables – the Premium Index and interest rates of the base and quote currency.
Some Observations on the Two
The charts of Funding and Premium index reveal that deviation in funding rate is usually higher than premium rates. That is, the premium rates rise and fall to high or low levels less often than the funding rate.
The funding and premium rate spikes are usually seen due to high volatility in the price.
In this graph, we can see that the previous bear market was consistently weak in terms of premium index. In May, when the shorts seemed to be compiling on, we saw one of the largest short squeeze in the market as well.
Moreover, consistently high indices and funding rate could become common if the bull market resumes like it did in May last year.
Currently, the premium rate is spiking, so it could signal a strong bullish trend if it continues like this.
Please share your views and feedback on the analysis!