What is the funding rate? Learn

Why perpetual futures have funding

Perpetual futures never expire, so nothing forces their price to meet the spot price at a settlement date. Funding does that job instead. At fixed times — every 8 hours on most contracts, every 4 or 1 hour on some — traders on one side pay traders on the other side a small percentage of their position.

• Positive funding: longs pay shorts. It happens when the perpetual trades above the spot price, usually because more traders want to be long.
• Negative funding: shorts pay longs. The perpetual trades below spot and the short side is more crowded.

The payment pulls the perpetual back towards spot: when being long costs money, fewer traders stay long. On most contracts the baseline rate is 0.01% per 8 hours.

Comparing rates fairly

A rate means nothing without its interval. 0.01% every hour costs eight times more than 0.01% every 8 hours. To compare coins, rates are converted to the same period — usually 8 hours. The cost also adds up: 0.1% per 8 hours is 0.3% a day, roughly 9% a month of position size, before any price move.

How to read funding

• Extreme funding — ten times the baseline or more — shows a crowded side. Crowded positions are fuel for squeezes: if the price moves against them, they close in a hurry.
• A flip from positive to negative or back shows sentiment changing sides.
• A spike — a large change since the last payment — shows positioning shifting fast.
• A divergence — the price rising while funding falls, or the other way round — shows that the move is not driven by the side paying funding.
• With open interest. Extreme funding with rising open interest means leverage is still building; with falling open interest, the crowd is already leaving.

Limits to keep in mind

Funding shows which side is crowded, not when the crowd will be wrong. In strong trends funding can stay extreme for days while the price keeps going. The current rate is also an estimate that changes until the payment time, and rates differ between exchanges. Read funding as a measure of positioning and cost, not as a timing signal.