Definition
A funding rate is a recurring fee paid between long and short positions in perpetual futures contracts, designed to anchor the contract price to the spot market. When the perpetual futures price trades above the spot price, the funding rate is typically positive and long positions pay shorts; when it trades below, the rate is usually negative and shorts pay longs. This mechanism helps reduce persistent price divergence between the perpetual contract and the underlying asset.
Funding rates are expressed as a percentage over a specific interval, such as every eight hours, and are calculated based on the difference between the perpetual futures price and the spot price, often with an additional interest or premium component. They are a core concept in derivatives trading on crypto exchanges and directly affect the cost of holding leveraged positions, influencing trader behavior and overall market positioning.
Context and Usage
In crypto markets, funding rates apply specifically to perpetual futures, a type of futures contract that has no expiry date. Because these contracts never settle like traditional futures, the funding mechanism provides an economic incentive for traders to keep prices close to the underlying asset, reducing structural imbalances. Persistent positive or negative funding rates can signal whether long or short positions are dominant in the market.
Funding rates interact with other trading concepts such as liquidation, since high positive or negative rates can increase the carrying cost of a position and contribute to stress on overleveraged traders. They are monitored by market participants to gauge sentiment and to understand the changing cost structure of maintaining futures exposure relative to holding the asset directly in the spot market.