Previously in our trading guides, we've covered topics like CME gaps and maker/taker fees. In this post, we'll dive into the concept of funding rates in Bitcoin and Ethereum perpetual contracts.
On social media, traders often discuss funding rates with phrases like:
"The next funding is highly negative—short squeeze incoming!"
"Bitcoin funding rate is too high; a dump is imminent."
But what exactly is a funding rate, and how does it work? Let’s break it down.
Funding Rate Definition
Funding is a core mechanism in perpetual contracts, ensuring the contract price stays tethered to the spot price. It involves periodic payments exchanged between longs (buyers) and shorts (sellers).
- Positive funding rate: Longs pay shorts.
- Negative funding rate: Shorts pay longs.
This system keeps perpetual swap prices aligned with the underlying asset’s spot price.
Key Features:
- Occurs every 8 hours on most exchanges.
- Applies to BTC, ETH, and altcoin perpetual contracts (both USDT and coin-margined).
- Excludes traditional futures (monthly/quarterly settlements).
Traditional Futures vs. Perpetual Contracts
Traditional Futures
- Have expiration dates (monthly/quarterly).
- Prices converge to spot at settlement.
- No funding fees.
Perpetual Contracts
- No expiry date—positions can stay open indefinitely.
- Use funding mechanisms to align with spot prices.
- Funding fees incentivize price convergence.
👉 Learn more about perpetual swaps
How Funding Rates Change
Funding rates fluctuate based on market sentiment:
- Bullish market: Funding rates rise (longs pay shorts).
- Bearish market: Funding rates drop (shorts pay longs).
Price Triggers:
- If perpetual price > spot price: Funding rate turns positive.
- If perpetual price < spot price: Funding rate turns negative.
How Funding Works
Exchanges display funding rates and predicted rates. For example:
- BitMEX: Shows funding rebates (fees paid/received).
- Bybit: Displays countdowns for next funding.
- Binance Futures: Shows current rates but not predicted fees.
Incentive Mechanism:
High funding rates discourage over-leveraged positions, nudging prices back toward spot levels.
Calculating Funding Fees
Funding fees depend on position size, not leverage.
Formulas:
Inverse Perpetual:
Fee = (Funding Rate × Position Notional) / Current BTC PriceUSDT Perpetual:
Fee = (Funding Rate × Position Notional) × Current BTC Price
Example:
- Position: 20 BTC, Funding Rate: 0.01%, BTC Price: $17,200
- Fee:
20 × 0.01% × 17,200 = $34.40
Where to Find Funding Rates
| Exchange | Funding Rate Display | Predicted Rate |
|----------------|----------------------|----------------|
| BitMEX | ✅ (with rebates) | ✅ |
| Bybit | ✅ (with countdown) | ✅ |
| Binance | ✅ | ❌ |
👉 Compare derivatives exchanges
Key Takeaways
- Funding ensures perpetual contracts track spot prices.
- Rates adjust every 8 hours based on market bias.
- Fees are peer-to-peer (not collected by exchanges).
- Position size (not leverage) determines fees.
- Historically, longs have paid more due to Bitcoin’s bullish trends.
FAQ
1. How often is funding paid?
Most exchanges settle funding every 8 hours.
2. Do I pay funding if I close early?
No. Fees apply only to positions held during funding intervals.
3. Why do funding rates exist?
To prevent perpetual contracts from deviating too far from spot prices.
4. Can funding rates predict price movements?
Not directly—they reflect trader sentiment but don’t guarantee price direction.
5. Which exchanges show predicted funding rates?
BitMEX and Bybit display upcoming rates; Binance does not.
Thank you for reading! For more trading insights, check out our other guides.
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