Basis Points
In Simple Terms: A basis point (bp) is 0.01%. If the funding rate is 10 bps, that is 0.10% per 8-hour settlement. Sounds small. But 10 bps three times a day, every day, compounded over a year on a leveraged position — that small number becomes your single largest trading cost. Understanding basis points is understanding what you are actually paying to hold your positions.
A basis point (often abbreviated as bp or bps, pronounced "bips") is one-hundredth of one percent: 1 bp = 0.01%, 100 bp = 1%. The term originated in fixed-income markets to describe yield changes precisely without the ambiguity of percentage points ("rates rose 0.5%" — is that 50 bps or 0.5 bps?). In crypto derivatives, basis points are the standard unit for funding rates, exchange fees, and yield spreads — all numbers that seem trivially small in isolation but compound into massive costs or profits over time.
For traders, fluency in basis points is not optional. Every funding rate you see — 0.01%, 0.05%, 0.10% — is quoted in basis points (1 bp, 5 bp, 10 bp per 8-hour settlement). Converting bps per settlement into annualized costs or yields reveals the true magnitude of seemingly small numbers. A "cheap" 3 bp funding rate (0.03% per 8 hours) is 32.85% annualized on a leveraged position — a cost that makes most active trading strategies unprofitable over time if not properly factored in. The trader who calculates funding costs in basis points and annualizes them trades with an edge over the trader who sees "0.03%" and thinks "that is nothing."
How It Works
| Basis Points | Percentage | Example in Crypto |
|---|---|---|
| 1 bp | 0.01% | A typical very low funding rate |
| 5 bp | 0.05% | Moderate funding, noticeable over weeks |
| 10 bp | 0.10% | Elevated funding, significant cost |
| 25 bp | 0.25% | Extreme funding, usually short-lived |
| 50 bp | 0.50% | Very rare, market stress signal |
| 100 bp | 1.00% | One percent — a typical exchange trading fee |
Annualizing funding rates from basis points:
The funding rate is quoted in bps per settlement (typically every 8 hours = 3 settlements per day). To annualize:
Annual Cost (%) = (bps / 10,000) × 3 × 365
Example: Funding rate of 5 bps (0.05% per 8h):
- Per settlement: 5 / 10,000 = 0.0005 = 0.05%
- Per day: 0.05% × 3 = 0.15%
- Per year: 0.15% × 365 = 54.75%
A 5 bp funding rate costs 54.75% of your notional position value annually. On a 10x leveraged long, that is 547.5% of your margin annually. These numbers make clear why sustained positive funding is fatal to overleveraged longs and why basis points, properly understood, keep you out of bad positions.
Basis points in spreads and fees:
Exchange maker/taker fees are quoted in bps. A 2 bp taker fee (0.02%) means you pay $2 per $10,000 traded. A 10 bp spread between an asset's bid and ask means you immediately "lose" 0.10% on a round-trip trade (buy at ask, sell at bid). Tracking total trading costs in bps (spread + fee + funding + slippage) reveals the true hurdle rate your strategy must overcome.
Why It Matters for Traders
Small bps differences compound into large dollar differences. On a $100,000 notional perp position held for one month, the difference between a 1 bp and 5 bp funding rate:
- 1 bp: $100,000 × 0.01% × 3 × 30 = $900
- 5 bp: $100,000 × 0.05% × 3 × 30 = $4,500 The $3,600 difference is pure cost — it goes to paying funding, not to P&L. This is why monitoring funding rates across exchanges (Kingfisher aggregates this) and choosing the exchange with lower funding for your position direction is a direct profit-improvement action.
Basis points as a precision tool for comparing opportunities. When evaluating:
- Staking yield: 3.2% APR = 320 bp
- Lending yield: 4.5% APR = 450 bp
- Basis trade yield: 10% annualized = 1,000 bp
- Funding rate cost: 5 bp/8h = 5,475 bp annualized
Normalizing everything to basis points enables clear comparison. The lending yield of 450 bp might look attractive until you annualize the basis trade at 1,000 bp — the basis trade offers more than double the yield with arguably less risk (delta-neutral vs. lending protocol smart contract risk).
Fee structures in bps reveal exchange economics. Exchanges compete on fees in basis points because traders are highly fee-sensitive. A 1 bp difference in taker fee (0.05% vs. 0.04%) saves $1 per $10,000 per trade — significant for high-frequency or large-size traders. Understanding your effective fee rate in bps and how it compares to alternatives is basic cost management.
Common Mistakes
- Treating bps as negligible because the percentages look small. This is the most expensive mistake in derivatives trading. 3 bps per 8 hours = 32.85% annualized. 10 bps per 8 hours = 109.5% annualized. These are not small numbers — they are account-destroying costs for positions held over time. Internalize the conversion from bps/settlement to annualized percentage.
- Ignoring the compounding effect of funding rates. Funding costs compound because they are deducted from your account balance (reducing the capital available to earn returns) or added to your liability. The actual cost is higher than the simple annualized calculation due to this compounding effect. For precise cost projections, use compound formulas.
- Comparing funding rates without accounting for leverage. A 5 bp funding rate costs 5 bp of notional, not 5 bp of margin. On 10x leverage, the cost relative to margin is 50 bp per settlement — 1.5% per day of your margin, not 0.15%. Traders who quote funding costs relative to notional underestimate the impact on their margin account. Always calculate funding cost as a percentage of your margin (position size), not just notional.
FAQ
Q: Why are they called "basis points"? A: The term originates from the "basis" (difference) between two interest rates or yields. One basis point is the smallest measurable unit of that difference. The name has nothing to do with "basis" in the futures/spot sense — it is a historical term from fixed-income markets that crypto adopted.
Q: How do I quickly convert bps to annual percentage? A: Multiply bps per 8-hour settlement by 1.095 to get approximate annual percentage. Example: 5 bps × 1.095 ≈ 5.475% per year per 1x notional leveraged. For the precise calculation: (bps / 10,000) × 3 × 365 × 100. The quick mental math of "bps × 1.1 = annual %" is close enough for most purposes.
Q: What is considered a high funding rate in bps? A: Context matters by market conditions, but as rough thresholds: 0-3 bps (0-0.03%) = low, neutral. 3-10 bps (0.03-0.10%) = elevated, factor into trade costs. 10-25 bps (0.10-0.25%) = high, positions should have strong conviction to justify cost. 25+ bps = extreme, historically unsustainable, often precedes reversals. These are per-8-hour-settlement rates.
Deep Dive
Want to explore further? Check out:
- Funding Rate Explained: Calculate, Predict, and Profit from Crypto Funding
- Leverage Trading Crypto: Complete Guide to Margin Trading 2026
- Open Interest Explained: What OI Tells You About Crypto Market Trends
- Perpetual Swaps Explained