What is a funding rate?
- Author
- CRYPTO PORT Editorial
- Published
- Updated
- Reading time
- 4 min
In short
The funding rate is the periodic payment exchanged between long and short holders of a perpetual swap to keep its price near spot. When the perpetual trades above spot, longs pay shorts; when it trades below, shorts pay longs. The money moves between traders, not to the venue.
Key points
- A payment that pulls the perpetual price toward spot
- Perpetual above spot: longs pay shorts
- Perpetual below spot: shorts pay longs
- It flows between traders, not to the exchange
Definition
A payment exchanged at fixed intervals between holders of long and short perpetual positions, with the direction and size determined by how far the perpetual price sits from spot.
The direction trips people up, so start there. A perpetual trading above spot signals too many longs, and in that state longs pay shorts. Longs trim to avoid the cost, shorts are paid to take the other side, and the perpetual drifts back toward spot. When the perpetual trades below spot the whole thing reverses.
Intervals vary by venue, with payments every few hours being typical. The rate itself moves constantly and grows largest when the market is crowded in one direction. A negative figure simply means shorts are paying longs rather than the other way round.
For positions held over time, these payments add up. With the price completely unchanged, a trader on the paying side sees their P&L bleed away. On the receiving side it accumulates — but only because they are carrying directional exposure in return. Choosing a side on the funding rate alone regularly ends in losses that dwarf the payments.
Watch out for
- · On the paying side, simply holding the position erodes P&L even with no price move
- · The rate is not fixed and can change sharply within hours as positioning shifts
- · Holding a position to collect funding exposes you to price moves that can dwarf the payments