Funding Rate Explained 

Perpetual futures never expire, so what keeps their prices aligned with the spot market? This video explains how funding rates work, which side pays, how the rate is calculated, and why repeated funding payments can significantly affect the cost or return of a position.

A perpetual futures contract never expires. That’s what makes it so convenient, but it also creates a problem.  

With dated futures, the settlement date pulls the contract price toward the spot price. A perp has no settlement date, so something else has to keep its price anchored to the real market.  

That something is the funding rate.  

Funding is a small payment exchanged between traders at regular intervals, often every eight hours.  

It’s not a fee. The exchange doesn’t collect it. The money flows directly from one side of the market to the other, from longs to shorts, or from shorts to longs.  

Which side pays? Whichever side has pushed the perp price away from spot. 

When the perp trades above spot, buyers are dominating. The funding rate turns positive, and longs pay shorts.  

Holding a long now costs a little money every interval, while holding a short earns a little. That pressure encourages selling and pulls the perp back down toward spot.  

When the perp trades below spot, the opposite happens. The funding rate turns negative, and shorts pay longs, nudging the price back up.  

So where does the number itself come from? The exact formula varies by exchange, but most build it from two parts.  

The first is the premium. This measures how far the perp price is trading from the spot index. The bigger the gap, the bigger the premium.  

The second is a small interest rate component, reflecting the cost of the currencies involved in the contract.  

Put simply, the funding rate is roughly the premium plus the interest adjustment.   

Funding Rate = Premium Component + Interest Rate Adjustment  

Most exchanges also apply caps and smoothing so the rate can’t swing too violently from one interval to the next.  

Let’s look at a simple example on BTC/USD.  

Suppose the BTCUSD perp is trading above the spot price, the funding rate is positive, published at plus 0.03%. Meanwhile, you’re holding a long position worth $10,000.  

At funding time, you pay $10,000 times 0.03%, which is $3. A short trader on the other side receives that $3.  

Flip it around. The perp is now trading below spot, so the funding rate is negative, say minus 0.02%. Shorts pay, longs collect. On the same $10,000 position, that’s $2 into your account. 

Each funding payment is small, but they repeat every interval, around the clock. Hold a position for weeks and funding can quietly become one of your biggest costs, or a steady source of income.  

So before trading any perpetual, check three things. The funding rate, how often it’s paid, and which side of it you’ll be on.