Perpetual futures funding rates, explained
Perpetual futures, or perps, are among the most traded instruments in crypto. They behave like futures contracts with no expiry date. That raises a question: without an expiry date pulling the contract back to the underlying asset’s price, what keeps the two close together? The answer is the funding rate.
What a funding rate is
A funding rate is a periodic payment between traders who hold long positions and traders who hold short positions in a perpetual contract. It is paid at fixed intervals, and its size and direction change with market conditions.
- Positive rate: longs pay shorts.
- Negative rate: shorts pay longs.
The exchange does not keep the funding payment. It passes from one side of the market to the other.
Why perpetuals need one
A traditional futures contract expires. As expiry approaches, its price converges on the spot price, because at expiry the two must match. A perpetual never expires, so it needs another mechanism.
Funding is that mechanism. If the perpetual trades above spot, the rate tends to turn positive, which makes holding longs more expensive and shorts more attractive. That pressure pushes the perpetual’s price back toward spot. The reverse happens when the perpetual trades below spot.
How the rate is set
Exact formulas differ by venue, but most follow the same structure:
- A premium component. Measures how far the perpetual’s price sits above or below an index of spot prices, averaged over the interval.
- An interest component. A small fixed rate reflecting the difference in borrowing costs between the two assets in the pair. On many venues it is set at 0.01% per 8-hour interval.
- Caps and clamps. Limits on how far the rate can move in a single interval.
Your venue publishes its formula, the current rate and the predicted next rate on the contract page.
How to calculate what you pay or receive
The calculation is the same everywhere:
Funding payment = position notional value × funding rate
Notional value is the size of the position at the mark price, not the margin you posted.
Worked example: a positive rate
- Position: long 0.1 BTC perpetual
- Mark price: $60,000.00
- Notional value: 0.1 × $60,000.00 = $6,000.00
- Funding rate: +0.01% per 8 hours
Payment per interval: $6,000.00 × 0.0001 = $0.60, paid by the long to shorts.
Over a day with three 8-hour intervals: $0.60 × 3 = $1.80.
Leverage does not change this. Whether that $6,000.00 position uses $600.00 of margin at 10x or $3,000.00 at 2x, the funding payment is the same, because it is charged on notional value. As a share of margin, though, funding weighs far more heavily on the higher-leverage position.
Worked example: a negative rate
- Position: short 2 ETH perpetual
- Mark price: $3,000.00
- Notional value: 2 × $3,000.00 = $6,000.00
- Funding rate: −0.02% per 8 hours
Payment per interval: $6,000.00 × 0.0002 = $1.20, paid by the short to longs.
What a rate means over a year
A rate that looks tiny per interval adds up. At +0.01% every 8 hours, held constant, the simple annual cost is 0.01% × 3 × 365 = 10.95% of notional value. Rates rarely stay constant, but the arithmetic shows why traders who hold perpetual positions for weeks keep an eye on funding.
What the rate tells you, and what it does not
Funding is a reading of positioning. A strongly positive rate shows that traders are paying a premium to hold leveraged longs. A strongly negative rate shows the opposite. Traders often watch funding alongside open interest and volume to understand how crowded one side of the market is.
What funding does not do is forecast price. Positioning can stay one-sided for a long time, and a high rate on its own says nothing certain about the next move.
Common mistakes
- Calculating on margin instead of notional. Funding is charged on the full position value.
- Ignoring the interval. An 8-hour rate and a 1-hour rate of the same size are very different daily costs.
- Forgetting the sign. The same rate is a cost on one side and income on the other.
- Treating funding as a signal on its own. It describes the market’s positioning, not its direction.
Related concepts
Funding matters most for leveraged positions; leverage, margin and liquidation covers how those work together. For the orders used to open and close perp positions, see market, limit, stop and stop-limit orders explained.
Frequently asked questions
Who pays the funding rate?
It depends on the sign. When funding is positive, traders holding long positions pay those holding shorts. When it is negative, shorts pay longs. The exchange does not keep the payment; it passes between traders.
How often is funding paid?
Many venues settle funding every 8 hours, and some use 1-hour or 4-hour intervals for certain contracts. Check the contract specification on your venue, because the interval changes the daily cost.
Do I pay funding if I close my position before the funding time?
Generally no. Funding is exchanged between traders holding positions at the funding timestamp. A position opened and closed between two funding times usually neither pays nor receives funding.
Does a high funding rate predict a price drop?
No. A high positive rate shows that demand for leveraged long exposure is strong relative to shorts at that moment. It describes positioning, not what price will do next.
Hippo provides information, not investment advice.
