Glossary
Funding rate
The funding rate is a periodic payment between long and short traders in perpetual futures that keeps the contract price close to spot.
The funding rate is a payment that long and short traders in a perpetual futures market exchange at fixed intervals. The exchange sets the interval. The rate depends on the gap between the perpetual price and the spot or index price. The exchange does not collect the payment. Traders pay each other.
When the rate is positive, long traders pay short traders. This usually happens when the perpetual price is above spot. When the rate is negative, short traders pay long traders. The rate is quoted per interval, and analysts often annualize it for comparison. Each exchange uses its own formula.
The funding rate describes how crowded one side of the market is. It does not predict the price direction. A high positive rate can last a long time in a trend. Read it with open interest and liquidation data, and compare rates across exchanges before you draw a conclusion.
Example
The funding rate is 0.01 percent and a long trader holds 10,000 dollars. The long trader pays 1 dollar to the short side at the next payment.