Funding rate

A funding rate is a periodic payment between traders holding long or short positions in perpetual futures. This payment helps keep the contract price close to the market price of the cryptocurrency.

What is a funding rate?

A perpetual future is a contract that lets you bet on whether a cryptocurrency will rise or fall in price without buying it yourself. This type of contract has no fixed expiration date.

As a result, the contract price can differ from the spot price, the price at which you buy or sell crypto right away. Funding encourages traders to bring these prices closer together.

Is the funding rate positive? Then traders with long positions usually pay traders with short positions. With a negative funding rate, short traders usually pay long traders. The payment is made at set intervals and depends on the size of the position.

An example of a funding rate

Suppose you have a long position in a perpetual future. At the settlement time, the funding rate is positive and your position is still open. You then pay funding to traders with short positions.

What if the same position is open during a negative funding rate? You may receive funding instead. This shows that the direction of the payment depends on both the rate and your position.

Why is a funding rate important in crypto?

Funding rates often come up in news about perpetual futures and trading on a crypto exchange. A high or low rate mainly shows how the contract price compares with the spot or index price used.

A positive funding rate doesn’t automatically mean the crypto market will rise. A negative rate doesn’t automatically mean the market will fall either. The rate doesn’t predict future prices.

Funding is separate from the fees for opening or closing a trade. If you keep a perpetual position open for a long time, you may make or receive multiple funding payments. For large positions with leverage, these payments can reduce the available margin and, in some cases, lead to liquidation.