What is the funding rate?

Why pay for an open position even when the price isn’t moving? In contracts with no expiry (perpetual futures), there’s a funding mechanism that creates exactly this charge or, depending on your side, a matching payment to you.

These contracts don’t have an expiry date that eventually pulls them toward the spot market price. The funding rate acts as a financial incentive to keep the gap in check. When it’s positive, longs pay shorts, meaning those betting on a rise pay those betting on a fall. When it’s negative, the payment flows the other way.

Imagine two connected vessels: the mechanism helps the prices converge without guaranteeing they’ll always be the same. Its calculation usually takes into account the contract’s deviation from a reference price, along with other platform parameters.

Why it matters

The payment is calculated on the notional value of the position, not just the money you’ve put up as collateral. For example, on a position worth €10,000, a funding rate of 0.01% means a payment of €1 for that period. If your collateral is €1,000 because of leverage, that €1 is 0.1% of your collateral.

Recurring payments can reduce a position’s profit or increase its loss. We think funding deserves its own line in your cost calculation, next to trading fees. For someone who buys and holds the cryptocurrency itself on the spot market, there’s no such payment.

What to watch out for

Payment frequency, calculation method and caps vary by platform and contract. The displayed rate may be an estimate for the next payment, not a charge that has already been finalized.

A high positive funding rate may signal strong pressure from the long side, but it doesn’t, on its own, predict the next price move. Also, receiving funding doesn’t eliminate the risk of a loss or of the position being liquidated.