Know The Funding Rate
📘 What is Funding Rate?
Funding rate is a recurring fee exchanged between traders holding long and short positions in perpetual futures contracts. Its purpose is to ensure the contract price aligns with the spot market price.
| Funding Type | Who Pays Whom? | Condition |
|---|---|---|
| Positive Funding | Longs pay Shorts | When demand for longs is higher |
| Negative Funding | Shorts pay Longs | When demand for shorts is higher |
⏱️ Funding Rate Frequency
| Exchange | Interval | Times (UTC) |
|---|---|---|
| Binance | Every 8 hours | 00:00, 08:00, 16:00 |
| Bybit | Every 8 hours | 00:00, 08:00, 16:00 |
| OKX | 3 times/day | Variable by contract |
🔍 Why It Exists
Perpetual contracts don’t expire, unlike traditional futures. Funding incentivizes balance between longs and shorts, keeping prices stable with spot markets.
💡 Funding vs. Interest
| Aspect | Funding | Interest |
|---|---|---|
| Charged By | Other Traders (P2P) | Exchange/Broker |
| Purpose | Balance market direction | Cost of borrowing margin |
| Exchange Profit | No | Yes |
📉 Risks of High Funding
- Slowly drains profit in sideways markets
- High funding can signal over-leveraged crowd
- Hidden cost for long-term holders
📈 Strategic Uses
- Short when funding is high (if you're bearish)
- Hedge spot with futures in high funding conditions
- Earn from delta-neutral funding arbitrage
Long 1 BTC spot, Short 1 BTC perpetual.
Funding = +0.05%/8h → Earn ~$15/day passively.
❓ Common Questions
- Q: Can I avoid funding?
A: Yes, by not holding during funding snapshots. - Q: Is it always charged?
A: Yes, unless rate = 0%, which happens rarely. - Q: What if funding is very high?
A: It may signal opportunity for short/arbitrage.
🔗 Useful Resources
The funding rate is calculated based on two main components: the interest rate and the premium index. The formula typically used by exchanges is:
Where:
- Interest Rate reflects borrowing cost differences between assets
- Premium Index reflects the divergence between perpetual and spot prices
📊 Funding Rate Volatility
Funding rates can fluctuate significantly, especially during:
- Periods of high leverage or extreme sentiment (FOMO/panic)
- Sudden market rallies or crashes
- Illiquid trading hours or weekends
Experienced traders often track funding rate trends to detect crowd bias and potential reversal zones.
🧠 What Funding Rate Tells You Psychologically
Funding rate isn’t just a fee—it's also a sentiment gauge. For example:
- Very high positive funding: Extreme bullish sentiment; risk of correction or "long squeeze"
- Very negative funding: Extreme bearish sentiment; possible rebound or "short squeeze"
💼 Institutional Insights
Institutions and quant funds often use funding rate signals to:
- Enter mean-reversion trades
- Harvest funding through sophisticated arbitrage models
- Detect market stress points or liquidations
High funding rates often correlate with elevated liquidation levels on one side of the market.