How Funding Rates Work
Perpetual futures contracts have no expiration date (unlike traditional futures). Without an expiry mechanism to converge the price, funding rates serve this purpose:
- When funding rate is positive: Longs pay shorts (contract price > spot price)
- When funding rate is negative: Shorts pay longs (contract price < spot price)
- Payments occur every 8 hours on most exchanges (00:00, 08:00, 16:00 UTC)
Example:
- BTC perpetual contract price: $51,000
- BTC spot price: $50,000
- Funding rate: +0.01% (positive)
- Your long position: $100,000
- You pay: $100,000 × 0.01% = $10 every 8 hours
Funding Rate Calculation
Most exchanges use this formula:
Funding Rate = Premium Index + clamp(Interest Rate - Premium Index, -0.05%, 0.05%)
Where:
- Premium Index: Difference between contract price and spot price
- Interest Rate: Usually 0.01% per 8 hours (0.03% daily)
Why Funding Rates Matter for Margin Traders
1. Cost of holding positions: Positive funding on longs = ongoing expense 2. Income opportunity: Being on the receiving side earns you money 3. Market sentiment indicator: High positive rates = bullish sentiment 4. Strategy component: Funding rate arbitrage strategies exist
Typical Funding Rates
| Market Condition | Typical Rate | Annualized |
|---|---|---|
| Normal market | 0.01% / 8hr | ~11% |
| Bullish market | 0.05-0.1% / 8hr | ~55-110% |
| Extreme greed | 0.1-0.5% / 8hr | ~110-550% |
| Bearish market | -0.01% / 8hr | ~-11% |
Funding Rate Arbitrage
Traders can profit from high funding rates by: 1. Going long on spot (buy the asset) 2. Going short on perpetual futures 3. Collecting the positive funding rate from short position 4. The positions hedge each other, and you earn funding
This is called a "cash and carry" or "basis trade" and is common among institutional traders.