Genuine question - Why is perpetual crypto trading impermissible? & What is wrong with funding rate?

Hello,

I am genuinely interested to get a detailed answer to this, crypto assets trading is relatively new and some of the traditional financial concepts possibly do not apply i.e Forex and conventional futures.

I have been searching and also reading some of the posts on this forum and other Islamic website on the subject, but most of these generally to traditional finance.

Here is my understanding and some questions for discussion:

Marging / Leverage Trading (Interest) - there is no interest on the margin, but there is a funding fee directly between buyer/sellers to incentivize liquidity. There are other post on the forum regarding this but there is no response, just many many questions. The funding rate is applicable whether you are using leverage or not.

So, what exactly is the issue with the funding rate?

Gharar/Maysir - I suspect these would be present, but if there is due deligence in technical analysis and study of the markets, this is reduced to probabilities and you are exucuting the order with high probability. As mentioned, here Chart / Technical Analysis is not considered haram. Depending on the view taken, day trading / margin trading can be considered as a form of gambling.

I suspect this is a moral question, when is trading considered gambling?

Derivatives - With my limited knowledge, the main issue here is possession and/or delivery of assests. As these are digital assets the issue of delivery is probably not applicable (inverse contract); as for possession, I suppose there is the initial margin plus the leverage as mentioned above. I have not found anything to suggest that borrowing money to generate profit is haram. Again, this is just based current understanding of what I have read so far.

Derivatives is minefield and I do not pretend to understand it, the above statement is oversimplification of very complicated subject.

Zero Sum Game - I guess day trading is a zero sum game, I don’t really know where to stand on this one.

I am a creature of curiosity and pedantic with subjects of interest, I am looking to generate a discussion, potentially something that leads to further reading. Please respond with details. I appreciate your understanding and willingness to take the time to provide a detailed answer.

Thank you,
jazakallah khair

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On Binance futures market, the interest rate is fixed at 0.03%, and the premium varies according to the price difference between futures and spot markets. Binance takes no fees for funding rate transfers as they happen directly between users.
There is interest involves in future trading on binance. So riba is haram in Islam

Thank you for your reply.

Funding rates make the perpetual futures contract price is close to the index price (spot price). The funding rate is not a fee charged by the exchange. The exchange (broker) does not take the funding rate, it is directly between the platform users.

When we think of interest, it is usually a lendor and debtor, and the lender gains from interest.

How should we interpret the funding in this case?

@Mufti_Billal @Mufti_Faraz_Adam
What are you thoughts on this?

@Mufti_Billal @Mufti_Faraz_Adam your perspective is appreciated.

Salam aleykum,

I am facing exactly the same situation (or almost exactly the same), and share similar thoughts as you, but I also seek support in understanding the issue as I am not a knowledgeable person.

in my case it is about a decentralized derivatives exchange, which is different from what existed before in many aspects.

  1. There is no broker anymore. Trading is done between users who provide liquidity (thereby earning rewards from the network) and traders.

  2. There is no interest, only a funding fee, which ensures that the balance between liquidity pools and contract volumes remains the same (thus the contract volume is completely secured with real crypto assets unlike the traditional financel world where the contract volume exceeds the liquidity).

  3. Having lost a lot through last week, for example, I opened position to recover my losses in the long run. It is just as speculative for me as if I would buy the asset myself. (It’s more of an attempt to smooth the waters and of less speculative nature. (hedging/ROI))

  4. Since there is no broker, I can liquidate my position at any time and withdraw my deposited assets, I can also withdraw my position as NFT tokens. You can even trade your position at the blockchain, transfer it or even gift it you your loved ones.

As far as I know, there are three major problem areas with derivatives:

  1. interest
  2. speculative nature
  3. it is not covered and in many cases it does not exist.

But all those 3 doesnt apply to this new kind of DeFi derivative trading?!

All forms of trading stock or crypto is speculative, I guess it just depends on your time horizon, whether you’re holding short term or long term.

Crypto derivatives and leveraged positions do not have the traditional interest, but a funding fee. Is the funding fee considered in the same category as interest? The funding fee mainly exists to act a price anchor and ensure liquidity.

Also, is it reasable to compare crypto derivatives to traditional derivatives? They do not all operate the same, I guess. Of course there are crypto derivatives structured to replicate traditional ones, but that is not what is being asked here.

This is a bit of a controversial subject on this forum, I suspect, this post will just be ignored, like many relating to crypto assets.

@xyz Salam. Please let us know if u got any more info / replies from your researchon this topic.

@Rizvix0 I am trying to be objective in my research without any confirmation bias, this is one of the reason I posted on this forum, to get unbiased more informed perspective from @Mufti_Faraz_Adam and @Mufti_Billal

Thanks

1 Like

brother there are two fees binance is deducting from future trader. one is funding fee and binance has no share in it as it clearly mentions . second is an interest rate which is fixed up to 0.03% and divide it into three interval per day. every 8 hour future tradier pay 0.01% fixed interest . so there is interest rate and it is clearly haram
.

assalamualaikum, Is it halal or haram?

Perpetual futures as they do not have expiry date and is based on an underlying Index Price hence the ‘funding rate’ as settlement between different sides of the trade.

This settlement (funding rate) is usually cash settlement, however this various between exchanges as some exchange will have inverse pair trading (bybit) as the settlement will be whatever the underlying asset is. This what makes the funding rate problematic, only price difference is settled, there is no delivery of product. In general, this is the reason it is considered impermissible.

I would suggest to do your own research, and better educate yourself. The Mufti has ignored this post altogether. Do not expect to get halal/haram answer. Use this platform as another tool in your toolset to further your knowledge.

Jazakallah.

Salam,
What’s your opinion on BYBIT perpetual trading you think it is riba?
Can I open LONG position for 20-23 Hours?

Also for BNB coin on binance futures the interest is 0% can I trade with leverage in it?

Salam,

Futures Trading & leverage trading are considered impermissible by majority. Some of the analysis is beyond just the riba, you also have to consider Gharar, Maysir, funding rate and so on.

However, this is little more complicated, and there is no easy answer. It is probably best to exercise some caution until you are conformable to make more informed decision.

Jazakallah.

2 Likes

Jazakallah for Response!
Do you long crypto on bybit?

No, but technically during a bull market, if you are just holding your assets you are longing :slight_smile:
if you are not after a quick returns, you could get a decent returns with spot trading. It is easy to get sucked into the 5X or 10X returns hype. If you could double your position over a year, that is really really good.

Do not forget to cash out and realise profits, else it is just numbers on the screen.

Jazakallah

2 Likes

Salam,

Exactly sir what i was researching. I didn’t found anything that suggest borrowing money to generate profits is haram instead there are continuous statements that in perpetual futures there is no transfer of any asset.

Can anybody help me get rid of this confusion that if there is nọ transfer of any asset but there is proper analysis and sort of knowledge applied to that trade. Will it be haram?
And if it is haram i need proper reference with real examples out there.

Jazak Allah!