Some people are saying it's okay to short altcoins with a -2% fee, usually just before a crash. Let me explain how fees work. After reading this, you might not dare to short Altcoin recklessly.
The statement "extreme rates = impending collapse" is indeed true in certain scenarios. For example, if 50% of the spot market is about to be unlocked, and funds in the contract market are shorted first, the demand for short positions is greater than that for long positions, causing the rates to become extreme. Once the spot market is unlocked, the market will indeed collapse.
However, for "monster coins," this fee rate is something that market makers can control.
Let's first look at the formula for the rate:
Contract fee rate % = Risk-free rate + Premium index. Premium index = (Mark price - Spot price) / Mark price. Therefore, applying the formula above, theoretically, if the premium of the contract mark price being lower than the spot price exceeds the risk-free rate, the fee rate will be negative. The contract mark price is affected by the contract's order book; theoretically, the greater the demand for short positions, the negative the fee rate, and the greater the demand for long positions, the positive the fee rate. (Important note: it's "greater demand," not "greater position size.")
For example: If the spot price of a certain coin is 100 yuan, a long position in the contract places a buy order at 99.5 yuan (not daring to chase the price higher), and a short position in the contract places a sell order at 99 yuan (eager to dump the price). The actual transaction price is 99.25 yuan, which is lower than the spot price. Therefore, the fee rate is negative. This is an example of how the "high demand" for short positions leads to a negative fee rate.
How does that cryptocurrency exploit short sellers using this rule?
Suppose the market maker controls 99.99% of the spot market and wants to liquidate short positions. They build up enough long positions in low-priced contracts, and then push the price up. They can use a "small order book of long positions" to make the contracts fluctuate at high levels. As long as there are short positions open at the "current price", the contract price will be driven down sharply (because the order book of long positions is very thin). This will make the fees negative, and the short sellers will continue to pay the market maker's long position funding fees.
Then the money earned from the funding rate is used to further drive up spot prices, thereby achieving the goal of further short selling.
So what's the key point?
1. The fees aren't going to be pocketed by the exchange; they're going to your counterparties. 😅
2. The rate reflects the demand from both long and short positions, not the position size.
3. For cryptocurrencies prone to price manipulation, fee rates are not a good indicator of when they will crash.
4. The core of manipulating the market lies in absolute control of the spot market and a sufficient number of short sellers.
