In my previous article, I wrote about system trading as an analysis using AI.

This time, we engaged in discussions with AI to explore the Funding Rate as a new edge. I would like to write about the FR again, partly as a personal memo. In particular, the fact that the FR is not determined solely by the supply and demand of crypto assets, but is also greatly influenced by the US 10-year Treasury yield and interest rate increases due to policy changes in fiat currencies such as those of the Bank of Japan , was highlighted as a key point of consideration and left a profound impression on me.

Please note that all the text and materials in this document were created by AI.
The document's creation date is listed as October 2024, indicating that Gemini's final training session ended on that date, with the rest being supplemented by the Grounding with Google Search function (this article was written on April 23, 2026). Furthermore, I have not touched upon the implementation details, such as the Python code. That's all from me.

The following is from Google Gemini 3.1 Pro preview.

Funding Rate

Introduction

This document comprehensively examines the Funding Rate (FR), a unique mechanism in the cryptocurrency derivatives market, from its fundamental structure to its correlation with the macroeconomy and its specific applications as an "edge" in quantitative trading. Instead of viewing the
FR simply as a "transaction cost," this document aims to extract true signals from market noise by re-examining it as a meter representing the "total amount of desire and fear" among market participants, or as a mirror reflecting macroeconomic capital flows.

Chapter 1: Fundamental Concepts and Mechanisms of Funding Rate (FR)

1.1 Perpetual Futures and the Reasons for the Existence of Federal Reserves

In traditional financial markets, futures contracts have an expiration date, and as the expiration date approaches, the futures price converges to the spot price. However, "perpetual futures," which are prevalent in the cryptocurrency market, have no expiration date.
If left unchecked without an expiration date, there is a risk that the futures price will deviate indefinitely from the spot price due to speculative supply and demand. The "Funding Rate (FR)" acts as an anchor to prevent this deviation and to peg the futures price (Mark Price) to the spot price (Index Price).

1.2 Calculation Mechanism of FR and Supply and Demand Adjustment

The Federal Reserve (FR) is primarily calculated from two factors: the "premium index (price deviation)" and the "interest rate differential (Interest Rate)."

• Premium Index: When the futures price is higher than the spot price, the FR is positive, meaning long positions (buyers) pay a commission to short positions (sellers). Conversely, when the futures price is lower than the spot price, the FR is negative, meaning shorts pay to longs.
• Interest rate differential: The difference between the lending rates of a benchmark fiat currency (mainly US dollars/USDT, etc.) and crypto assets (BTC, etc.). This becomes the "baseline" for the Federal Reserve.

This mechanism imposes an economic penalty on holding a position in the direction of excessive price deviation, creating an incentive for arbitrageurs to build positions in the opposite direction, thus causing prices to converge.

1.3 Differences in settlement frequency among exchanges and annualized rate (APR) conversion

The frequency of FR (Financial Forecast) events varies from exchange to exchange, and this significantly impacts the behavior of market participants.

• Bybit/Binance (generally every 8 hours): Settlements are made three times a day. Payments are only incurred if you have a position at the moment of settlement (snapshot), so the algorithm that closes positions just before settlement and reopens them immediately afterward to avoid crossing the Fiscal Rate (FR) is more likely to work, and local price distortions (noise) are more likely to occur.
• DEXs like Hyperliquid (hourly): Settlements are made 24 times a day. Since fees are constantly being deducted, there is no escape route, and market frenzy and panic tend to be reflected in the data in real time as sharp spikes.

[The Importance of Annual Percentage Rate (APR) Conversion]
FR values (e.g., 0.0001) are not intuitively useful for gauging risk. To accurately assess the edge, it is essential to convert them to an "annual percentage rate."

• Hyperliquid's (hourly) rate of 0.0003 = 0.0003 x 24 hours x 365 days = approximately 262% annually.
  By performing this conversion, we can gain a concrete market perspective that "individual investors who continue to hold long positions even at the cost of paying an annual interest rate of 262% will not last long (i.e., the limit of the upward trend)."

Chapter 2: Examining Market Psychology and "Distortions" Created by FR

2.1 Extreme Values (Spikes) as Visualization of Mass Psychology

Unlike oscillator-based technical indicators (such as RSI and MACD), the FR (Fees and Charges) is real data that "actually involves the movement of funds (fees)." Therefore, extreme spikes in the FR directly indicate the "degree of market participants' reliance on leverage."

• Intense positive FR: A public frenzy of "I want to buy now, no matter how much the fees are (FOMO: fear of being left behind)."
• Intense negative FR: Public panic stemming from the belief that "if you don't sell now, your assets will become worthless (FUD: fear, uncertainty, doubt)."

2.2 Regime Shift (Environmental Awareness) Judgment Meter

By observing the moving average of the Federal Reserve (FR) (e.g., the past 14 days), it is possible to determine with high accuracy whether the current market is in a "bullish regime" or a "bearish regime."
In a bullish market, even if prices correct (fall), the FR will not break below the zero line and will stop falling near the baseline. Conversely, in a bearish market, even if prices rebound, the FR will continue to hover in negative territory. This "center of gravity of the FR" reveals the fundamental bias of the market (whether it is bullish or bearish).

2.3 Detecting energy depletion through "divergence" between price and FR

One of the strongest edges that can be obtained from backtesting and observing long-term data is "divergence."
For example, if the BTC price breaks out of its recent high, but the FR spike at that time is significantly lower than when previous highs were broken, this means that "the price is rising, but no new leveraged funds (fuel) are flowing into the market." This is a "false rise" due to thin trading in the spot market or short covering, and is highly likely to trigger a major crash (bull trap) immediately afterward.

Chapter 3: Interaction between FR and Liquidation

3.1 Loss of margin due to fees

In an environment where high levels of FR (Financial Risk) persist, the margin of traders holding positions is eroded over time. For example, if a trader is forced to pay FR equivalent to 100% annually, even if the price does not move at all, the majority of their margin will disappear as fees within a few weeks.
This causes the margin maintenance ratio to fall below the actual stop-loss line (liquidation price), triggering a forced liquidation.

3.2 Triggers for a Squeeze (Buyback/Discount)

When the Federal Reserve (FR) is trading in negative territory (excessive short positions), and the price begins to rise slowly, driven by spot trading, short sellers will face a double blow: unrealized losses due to the price increase and a reduction in margin due to FR payments. If
short sellers can no longer withstand the pressure and are forced to liquidate (forced to buy back) their positions, this will create massive buying pressure, triggering a "short squeeze" that will involve liquidating short sellers at even higher price levels.

3.3 Integration with Liquidation Heatmap

By using FR to understand "which direction fuel (open positions) is accumulating in the market," and then using Liquidation Heatmap, it is possible to identify a "target price."

• Model 1 (Short-term high-leverage focused): In intraday scalping, set immediate stop-loss hunting targets.
• Model 2 (Full Leverage Integration): In swing trading, the profit target is set at the large liquidation pool (magnet) targeted by large investors (whales).
  By combining environmental recognition using FR and spatial recognition using heatmaps, it becomes possible to trade with risk-reward asymmetry.

Chapter 4: Correlation and Influence of Macroeconomics (Real Interest Rates) and the Federal Reserve

While cryptocurrencies may appear to be an independent market, the Federal Reserve's (FR) baseline is closely linked to the risk-free rate of fiat currencies. Trends in traditional finance (TradFi) directly influence the FR.

4.1 The yield on 10-year US Treasury bonds (US10Y) and the base FR

The "interest rate differential" incorporated into the FR calculation formula primarily depends on the cost of borrowing US dollars. When the Federal Reserve (FRB) raises interest rates and US Treasury yields rise, the cost (opportunity cost) of borrowing US dollars to buy BTC increases.
As a result, the entire baseline of the FR in the perpetual futures market shifts upward. In a high-interest-rate environment, the yield obtained from delta-neutral (buying spot + selling futures) arbitrage also rises, making it easier for institutional investors' arbitrage funds to flow into the cryptocurrency market.

4.2 Japanese government bond yields on 10-year bonds and the unwinding of yen carry trades

Historically, the Japanese yen, with its low interest rates, has been used as a funding currency to buy risk assets (including cryptocurrencies). When the Bank of Japan changes its monetary policy and the yield on Japanese government bonds rises (narrowing the interest rate differential), a "reversal of yen carry trades" occurs.
This macroeconomic outflow of capital triggers a "sell-off of physical assets" in the cryptocurrency market. At this time, panic short positions surge in the futures market, causing the Federal Reserve to record an abnormally negative value. Macroeconomic interest rate shocks and negative spikes in the Federal Reserve tend to occur simultaneously.

4.3 The Paradox of Physical ETF Inflows and Interest Rate Differentials

Since the approval of the physical Bitcoin ETF in the US in 2024, the market structure has changed. While institutional investors have been pouring in large amounts of capital through physical Bitcoin ETFs, quantitative players such as hedge funds have been extensively employing strategies to profit from interest rate differentials (basis and FR) by taking short positions in futures on the CME (Chicago Mercantile Exchange) and offshore exchanges.
This has created a situation where "physical Bitcoin is being bought, but short positions for arbitrage purposes are accumulating in futures," resulting in a paradox not seen in past cycles: despite a strong upward trend, the FR is not overheating (or even turning negative).

Chapter 5: Specific Strategies for Utilizing FR as an "Edge (Advantage)"

Based on the above considerations, we define four approaches to transforming FR into a source of profit (edge) in algorithmic trading.

Strategy A: Pure Income Gain Focused "Delta Neutral (Cash and Carry)"

• Logic: Purchase spot BTC on any exchange and simultaneously short the same amount of BTC in a futures market such as Hyperliquid.
• Edge: This approach safely collects only the high FRs that occur when the futures market is overheated with long positions, while completely eliminating price volatility risk (delta). It is the most effective institutional investor approach when the macro environment is bullish and base interest rates are high.

Strategy B: "Panic Rebound (Contrarian Long)" targeting extreme values of negative FR

• Logic: This strategy assumes a long-term upward bias in BTC. A long entry is made the moment the price plummets and the FR falls significantly below the baseline, reaching an extremely negative value (e.g., equivalent to -50% annually).
• Edge: The system detects the peak of public fear (total pessimism). It collects FR from short sellers while waiting for their margin strength to recover, aiming for capital gains from a sharp rebound due to short covering. Both the win rate and risk-reward ratio are high.

Strategy C: Targeting the end of a trend with a "divergence short"

• Logic: When the price breaks above a local high (recent high), compare the FR spike value and moving average with previous highs. If the price is rising but the FR peak value is falling (divergence occurs), it is judged as running out of fuel and a short position is taken.
• Edge: Avoid simple "high breakout" false signals and profit from stop-loss orders from long positions caught in bull traps.

Strategy D: "High-precision filter" for existing trend-following systems

• Logic: The Fibonacci Rate (FR) is used as the final filter for existing trend-following bots, such as moving average (MA) breakouts and channel breakouts. Even if a buy signal is generated, the entry is skipped if the FR reaches an outlier value on an annualized basis (e.g., over 50%).
• Edge: Rather than maximizing profits, the focus is on eliminating "buying at high prices with a low win rate (getting whipsawed)," dramatically reducing the system's maximum drawdown, and improving the Sharpe ratio.

conclusion

The Funding Rate (FR) is not simply a "cost to be paid" in the cryptocurrency market. It represents the "total amount of desire" of market participants worldwide through leverage, the "break-even point for arbitrage" for institutional investors, and the "pulse of the cryptocurrency economy" that is linked to macro interest rates.

As backtesting has proven, simply using FR values as a superficial contrarian signal will result in being overwhelmed by trading fees and the force of trends. However, by adopting a "three-dimensional and deep perspective" that includes understanding the essential costs on an annualized basis, detecting energy depletion through divergence, and examining its correlation with the clearing mechanism and macro interest rates, FR transforms into the most powerful leading indicator (edge) that reflects the truth faster than anyone else in the market.

System traders, instead of simply tracking the price as the outcome, analyze the "cause" (the distortion of capital and psychology) of Fibonacci (FR), which is the first step to consistently and logically extracting profits.