Funding Rate
A funding rate is a periodic payment exchanged between long and short traders in many perpetual futures markets. Its purpose is to help keep the perpetual contract price aligned with the underlying spot market.
✦ Key Insight
Funding changes the true cost of holding a perpetual position. A trader can correctly predict price direction but still lose part of the expected return through repeated funding payments. Funding also provides information about positioning and market sentiment.
✕ Common Misconceptions
Ignoring funding before entering
Comparing rates with different intervals
Treating positive funding as an automatic short signal
Calculating payments from margin rather than position value
Forgetting funding when calculating PnL
Holding highly crowded positions without understanding cost
Detailed Explanation
How It Works
Generally:
Positive funding: longs pay shorts.
Negative funding: shorts pay longs.
The rate and payment interval depend on the exchange.
Suppose the funding rate is 0.01% and a trader holds a $100,000 notional long position.
The approximate funding payment for that interval would be $10, subject to the platform's exact methodology.
Strongly positive funding may indicate crowded leveraged longs. Strongly negative funding may indicate crowded shorts.
Neither automatically predicts a reversal.
FAQs
Does positive funding mean the market is bullish?
It may reflect stronger demand for leveraged longs, but it is not a prediction.
Can funding become negative?
Yes.
Do spot traders pay funding?
No. Funding is associated with derivatives such as perpetual futures.
In Practice
Dig Deeper
Perpetual Futures
Perpetual Futures (Perps) Perpetual futures, often called perpetuals or perps, are derivative contracts that track the price of an underlying crypto asset without having a fixed expiry date.
Basis Trade
A basis trade is a market-neutral strategy that profits from the price difference (the "basis") between a spot asset and its futures contract, or between two derivatives on the same asset. The trader holds offsetting positions so directional price moves largely cancel out.
Liquidation
Liquidation occurs when a leveraged trading platform forcibly reduces or closes a position because the trader no longer has enough margin to satisfy the required maintenance margin.