What Is the Funding Rate?
The funding rate is a periodic payment exchanged between long and short position holders in perpetual futures contracts. Unlike traditional futures that expire, perpetual contracts use the funding mechanism to keep the contract price aligned with the spot market price.
How the Funding Rate Works
When the perpetual contract trades above spot (bullish positioning), the funding rate is positive — longs pay shorts. When it trades below spot (bearish positioning), the funding rate is negative — shorts pay longs. Payments occur every 8 hours on most exchanges.
The rate is typically expressed as a percentage per 8 hours. A rate of 0.01% is considered neutral. Rates above 0.05% signal overheated bullish sentiment; rates below -0.05% signal excessive bearish sentiment.
Why It Matters for Traders
Funding rate is one of the most exploitable metrics in crypto derivatives. Extreme positive funding often precedes long squeezes, while extreme negative funding precedes short squeezes. Funding rate arbitrage — going long spot and short perps during high positive funding — is a popular market-neutral strategy that earns the funding payments as yield.