Funding Rate
In simple terms
A funding rate is like a fee that traders pay each other on certain crypto exchanges. If more people are betting the price will go up, they pay those betting it will go down (or vice versa), which helps keep the exchange price in sync with the real market price.
Definition
Periodic payments between long and short traders to maintain price parity with the spot market.
In depth
Funding rates are recurring payments exchanged between long and short perpetual futures traders on leveraged trading platforms, designed to anchor the derivative contract price to the underlying spot market price. When the perpetual contract trades at a premium to spot, long traders pay shorts; when at a discount, shorts pay longs. The funding rate is typically calculated using a spread between the contract's mark price and the spot index price, with the actual payment amount determined by multiplying the trader's position size by the funding rate percentage. This mechanism incentivizes arbitrage that naturally corrects price divergence without requiring centralized price intervention.
How does Funding Rate work?
Exchanges calculate a funding rate for perpetual contracts at fixed intervals, typically every eight hours. The rate combines a premium component — how far the perpetual is trading above or below an index of spot prices — with a fixed interest component. When the perpetual trades above the index the rate is positive and long holders pay short holders; when it trades below, the rate is negative and shorts pay longs. The payment is a percentage of position notional, transferred directly between traders at the funding timestamp, with the exchange usually taking no cut.
An example
A trader holds a $20,000 notional long when funding for the period is +0.01%, in illustrative figures. At the funding timestamp they pay $2 to the short side. Held across three periods a day at that same rate, that is $6 daily and roughly $180 over thirty days, deducted from margin whether the position is showing a profit or a loss.
Figures are illustrative only.
What beginners get wrong
- Funding is charged on notional position size rather than on margin posted, so it looks trivial until leverage is taken into account.
- Only positions held at the funding timestamp pay or receive, so a position opened and closed between stamps pays nothing.
- Rates are recalculated each period and can flip sign, meaning a position that collects funding today may be paying tomorrow.
- Treating collected funding as reliable yield ignores that the underlying position can lose far more than the payments ever received.
Related terms
Part of
How does crypto trading and market structure work? — the subject page for trading and market structure, with all 27 of its definitions in one place.
Educational only — not financial advice.