What is a funding rate in crypto? Perpetual futures explained
A funding rate is a periodic payment between traders holding long and short positions in perpetual futures, the crypto contracts that never expire. When the contract trades above the spot price, longs pay shorts; when it trades below, shorts pay longs. These payments pull the perpetual contract price back towards the price of the underlying asset, and they can quietly add up to a large ongoing cost.
Before anything else: perpetual futures are leveraged derivatives, and most retail traders lose money with them. In the EU they are regulated as financial instruments and restricted for retail clients, and many large crypto exchanges don’t offer them to EU residents at all.
What is a funding rate?
The funding rate is the percentage that one side of a perpetual contract pays the other at fixed times, based on the size of their position. It is not a trading fee: on most exchanges the exchange does not keep it. It is money moving between long and short traders.
Traditional futures contracts have an expiration date, and on that date their price must meet the spot price. A perpetual contract has no expiry, so it needs another way to stay close to the spot market price. The funding rate is that payment mechanism.
A quick example. You hold a long perpetual position worth €10,000 in bitcoin, and the funding rate at the next interval is +0.01%. You pay €10,000 × 0.01% = €1 to traders holding short positions. If the rate were −0.01%, you would receive €1 instead.
Why funding rates exist in crypto markets
Funding rates exist to keep the perpetual futures price anchored to the spot price. If too many traders buy perpetuals, the contract price rises above spot. A positive funding rate then makes holding a long position more expensive and holding a short more attractive, which pushes the price back down.
- Positive funding rate: the contract trades above the index (spot) price, so longs pay shorts. This usually reflects bullish sentiment.
- Negative funding rate: the contract trades below the index price, so shorts pay longs. This usually reflects bearish sentiment.
- Near zero: the contract is close to spot and positioning is balanced.
How funding rates are calculated
Most exchanges calculate the funding rate from two parts: a premium index and an interest rate component.
Funding rate = premium index + interest rate component (within the exchange’s limits)
The premium index measures how far the perpetual contract price is from the underlying asset’s index price, an average of spot prices across several markets. The interest rate component reflects the difference in borrowing costs between the two assets in the pair, and on many contracts it is a small fixed figure. That is why the “neutral” funding rate on many contracts sits slightly above zero. Exchanges also cap the rate so it can’t swing too far in one interval.
The exact formula, the mark price and the cap differ between platforms, and they can change. Always check the exchange’s own methodology page before you trade.
Binance Futures funding rate
Binance Futures is one of the most-quoted sources of crypto funding rates, and its trading interface shows the current rate and a countdown to the next payment for every contract. For EU readers there’s a catch: Binance holds no MiCA licence and has stopped onboarding EU residents, as our Binance review explains, so it is not an option if you live in the EU.
Funding intervals and payment times
Funding is usually paid every eight hours, three times a day, though some contracts settle every four hours or every hour. The schedule is set per contract, so check the countdown timer on the trading interface.
You pay or receive funding only if you hold a position at the exact funding time. The amount is based on your position’s notional value (the full size of the position, not the margin you put in). Close the position a minute before the timestamp and you neither pay nor receive, although you still pay trading fees to open and close. Platform rules differ, so read them first.
Funding costs and the cost of holding
Funding costs are calculated on your full position size, but they come out of your margin, which is much smaller. That is what makes them expensive for leveraged traders.
Funding fee example
Say you deposit €1,000 and open a 10x long position, so the notional value is €10,000. The funding rate stays at a fixed level for a week, paid every eight hours:
| Funding rate per interval | Per interval | Per day (3×) | Over 7 days | As % of your €1,000 margin |
|---|---|---|---|---|
| +0.01% | €1 | €3 | €21 | 2.1% |
| +0.05% | €5 | €15 | €105 | 10.5% |
| −0.01% (you receive) | +€1 | +€3 | +€21 | +2.1% |
A short trader sees the same numbers with the signs reversed. At +0.05%, the price has to rise about 1% in a week just to cover the cost of holding, which at 10x is 10.5% of your margin. Add trading fees, and leverage itself: a 10% move against a 10x position wipes out your margin and triggers liquidation.
Reading positive and negative funding rates
Funding rates tell you how other traders are positioned, not where the price is going. A high positive funding rate means long positions are crowded and traders are paying a lot to hold them. Negative funding means short positions are crowded.
Traders often combine funding with other indicators, such as open interest (the total value of open contracts) and trading volume. Rising open interest plus high positive funding suggests a lot of leveraged buying.
When extreme funding rates matter
Extreme funding rates can come before sharp moves, because crowded positions are fragile. If many longs are paying high funding and the price dips, forced selling can turn it into a long squeeze. The mirror image is a short squeeze. But extreme funding can also last for days or weeks in a volatile market, so treat it as context, never as a reliable reversal signal.
Funding rate arbitrage
Funding rate arbitrage tries to collect funding payments without betting on the market direction. The classic version: buy bitcoin on the spot market and open a short perpetual of the same size. Price movements roughly cancel out, and when funding is positive, the short side receives payments.
It sounds simple, but the risks are real:
- Basis risk: the gap between contract and spot can widen against you.
- Liquidation risk: a sharp rally can liquidate the short leg before you add margin.
- Counterparty risk: you depend on the exchange staying solvent and letting you withdraw.
- Costs: trading fees, slippage and funding that turns negative can erase the profit.
Funding rates vs traditional finance
In traditional finance, the closest comparison is the cost of carry on futures, or the overnight financing fee on a CFD. The big difference is who gets paid. With a CFD, you pay financing to your broker. With crypto funding rates, you pay other traders, and the rate can change every few hours.
Managing funding rate risk
Check the funding rate before you open a position, and work out the expected cost for as long as you plan to hold it. Use small positions and low leverage, and remember that rates can change suddenly.
Perpetual futures are not a sensible way to own crypto for the long term. If you simply want exposure to bitcoin, buying on the spot market avoids funding costs and liquidation altogether. Our guide to crypto derivatives covers the wider picture, and our page on perpetual contracts explains the product itself.
EU rules on perpetual futures
In the EU, perpetual futures and other crypto derivatives are financial instruments under MiFID II, not crypto-assets under MiCA. Only firms licensed as investment firms may offer them to you, and they must check whether the product is appropriate for you and warn you about the risks. For crypto CFDs, EU rules cap retail leverage at 2:1. Brokers that offer CFDs must publish the share of retail accounts that lose money: Interactive Brokers shows 58.9% and Bitpanda 78.5% on their own websites.
So before you look at funding rates at all, check that the platform is licensed to offer derivatives where you live. Crypto-assets are highly volatile, and with leverage you can lose all the money in your account.
Questions people ask
What happens if the funding rate is negative?
When the funding rate is negative, traders holding short positions pay traders holding long positions. It usually means the perpetual contract trades below the spot price because more traders are betting on a fall.
What happens if the funding rate is positive?
When the funding rate is positive, longs pay shorts. It usually means the contract trades above the spot price and more traders are betting on a rise. Holding a long position then costs you money every funding interval.
Is a negative funding rate bullish?
Not on its own. Negative funding shows that many traders are short, which can set up a short squeeze if the price rises, but it can also simply reflect a falling market. Treat it as one signal among several, never as a prediction.
What is a funding fee in crypto?
The funding fee is the amount you actually pay or receive at each funding interval: your position's notional value multiplied by the funding rate. On most exchanges it goes to other traders, not to the exchange.
How do I calculate the funding rate?
Exchanges calculate it for you, usually from a premium index (the gap between contract and spot price) plus a small interest rate component. To work out your own cost, multiply your position size by the rate shown on the trading interface.