Funding Rate
The funding rate is a periodic payment exchanged between long and short holders of a perpetual futures contract to keep its price close to spot.
Every few hours, holders of crypto perpetual futures either pay or receive a small amount: the funding payment. It is the mechanism that keeps a contract with no expiry date close to the spot price, and it is a real cost — or income — for anyone holding a position.1 Funding rates are also watched as a sentiment gauge, because they show which side of the market is crowded. This entry explains who pays whom, how much, and what the rate tells you.
- Category
- Cryptocurrency and Blockchain
- Reading time
- 5 min
- Also called
- Funding, Funding fee, Funding payment
- Updated
The funding rate in plain words
The funding rate is a periodic payment exchanged directly between traders holding long and short positions; it is not a fee collected by the exchange.2
When the perpetual trades above spot, the rate is positive and longs pay shorts. When it trades below spot, the rate is negative and shorts pay longs.2 Either way, the payment makes the crowded side more expensive to hold, which pulls the price back towards spot. See Perpetual Futures.
How funding works, step by step
Premium is measured
The main driver is the gap between the perpetual’s mark price and the spot index price.2
An interest component may be added
Some platforms add a small fixed baseline, typically 0.01% per interval, so the rate is rarely exactly zero.2
The rate is set for the interval
Most centralised platforms settle every eight hours, often at 00:00, 08:00 and 16:00 UTC; some use hourly intervals.2
Payment is calculated on notional size
Funding = position value × rate, at the moment of settlement.2 Leverage does not reduce it.
Money changes hands
Positive rate: longs pay, shorts receive. Negative rate: shorts pay, longs receive.2
Repeat
The cost or income accumulates at every interval for as long as the position is open.
Worked examples
Example 1 — One funding payment
PayA trader holds a $100,000 BTC perpetual long. The next funding rate is +0.05%.
| Payment | $100,000 × 0.05% = $50 |
| Direction | Long pays short |
This is IG’s own worked example.2 The short side would receive the same $50.
Example 2 — Funding over a month
MonthlyThe rate stays at +0.05% per interval, three times a day, for 30 days.
| Per day | 3 × 0.05% = 0.15% |
| Per month | ≈ 4.5% of the position |
| On $100,000 | ≈ $4,500 |
A rate that looks tiny per interval becomes a significant drag over weeks.2 Against a $10,000 margin at 10×, that is 45% of the margin.
Example 3 — Collecting funding with a hedge
ArbitrageA trader holds 1 BTC spot and shorts 1 BTC of perpetuals while funding is positive at +0.01% per interval. BTC is $60,000.
| Price exposure | ≈ zero (long spot, short perp) |
| Funding received per day | 3 × $60,000 × 0.01% = $18 |
| Risks | Funding can turn negative; the short can be liquidated; basis can move |
This is funding-rate arbitrage. It carries basis risk, liquidation risk on the leveraged leg and the risk that rates reverse.2
Funding pulls the perpetual towards spot
Reading the funding rate
Why traders watch funding
Cost of holding
Funding is part of the true cost of any perpetual position held across intervals.
Sentiment gauge
Persistently high positive funding suggests crowded longs; traders compare it with open interest.2 See Open Interest.
Squeeze risk
Extreme funding on one side increases the chance of a sharp move against it. See Long Squeeze and Short Squeeze.
Hedging cost
A spot holding hedged with a short perp earns positive funding but pays when funding turns negative.2 See Hedging.
Advantages and disadvantages
Advantages
- Keeps perpetual prices close to spot without expiry dates.
- Transparent: rates are published before each interval.
- Doubles as a real-time positioning indicator.
Disadvantages
- Adds a recurring cost that grows with position size and time.
- Can change sign quickly in volatile markets.
- Formulas and intervals differ between exchanges.
- Extreme readings are a warning, not a timing signal.
Going deeper
Read as far as you need. Each level builds on the one before it.
Funding is between traders
Beginner
The exchange calculates the rate and moves the money, but the payment goes from one side’s traders to the other’s — not to the exchange.2
Annualising the rate
Intermediate
To compare funding with other costs, multiply by intervals per year: 0.01% every eight hours is 0.03% a day, or roughly 11% a year on the position’s value. Leverage makes that much larger relative to your margin.
Different formulas, caps and intervals
Advanced
Exchanges cap funding rates, choose different intervals and weight the premium differently, so the same market can show different funding on different venues. Some have moved to hourly intervals to reduce distortion around settlement times.2
Common mistakes
Calculating funding on margin
It is charged on the full position size, not the margin.
Ignoring funding in trade plans
Long-held perpetual positions can lose to funding even if the price barely moves.
Treating high funding as a short signal
Crowded longs can stay crowded; wait for price to confirm.
Forgetting settlement times
Opening just before settlement means paying (or receiving) a full interval’s funding.
Check your understanding
Test yourself before moving on. Each answer comes with an explanation.
Key points to remember
- Funding is a periodic payment between longs and shorts on perpetual futures.
- Positive: longs pay shorts. Negative: shorts pay longs.
- Most platforms settle every eight hours; some hourly.
- Payments are calculated on the full position size.
- Extreme rates signal crowded positioning, not a precise timing signal.
Frequently asked questions
Does the exchange keep the funding fee?
How often is funding paid?
Can funding be avoided?
Further learning
- Perpetual Futures
The contracts that funding applies to.
- Liquidation
How funding costs move your liquidation price.
- Hedging
How funding affects a hedge with perpetuals.
- Short Squeeze
What can happen when one side is very crowded.
Sources
This article is written in our own words. The sources below support the specific facts, rules and figures marked with a number in the text. Links open the original publisher’s page.
Educational content, not financial advice. Examples use hypothetical prices and simplified costs; actual fees, margin rules and regulations vary by broker, market and country. We are not affiliated with any publisher linked above. Last reviewed . Report an error or request a source credit.