What Is Funding Rate?
Also known as: Funding Fee, Perpetual Funding Rate, Perp Funding Rate
In short
The funding rate is the rate of the periodic payment exchanged at set intervals between long and short position holders to keep the price of perpetual futures contracts close to the spot market price.
Traditional futures contracts have an expiration date, and the contract price converges to the spot price as expiration approaches. Because perpetual contracts have no expiration, the funding mechanism takes over this function. If the contract price is above the spot price, the funding rate is positive and long position holders pay short position holders; if the contract is below the spot price, the rate turns negative and the direction of payment is reversed. Payments are made between users, not to the exchange, and are calculated every few hours on most exchanges.
For example, during a period when the rate is 0.01%, a holder of a $10,000 long position pays $1 in that funding period. Because the payment is charged on position size rather than on collateral, the cost can accumulate quickly in leveraged trades.
The funding rate is also used to monitor market sentiment. Positive rates that stay high for a long time indicate that leveraged long positions dominate the market; this can increase the risk of cascading liquidations during sudden drops. Even so, the rate alone does not give a definitive signal about price direction.
Last updated: · This content is for information purposes only and is not investment advice.