Understanding Funding Rates in Crypto Futures: When They Go Positive or Negative
Funding rates are a key feature of perpetual futures markets, used to keep futures prices aligned with the underlying spot price of an asset like BTC or ETH. These periodic payments occur every funding interval (often every 8 hours) and are exchanged between traders on opposite sides of the market.
A positive funding rate happens when the perpetual futures price trades above the spot price. In this situation, long positions (buyers) pay a fee to short positions (sellers). This typically reflects bullish market sentiment, where more traders are betting prices will rise and are willing to pay for exposure. Consistently positive funding can indicate strong buying interest but may also signal over-leverage on the long side.
Conversely, a negative funding rate occurs when the futures price is below the spot price. Here, short positions pay long positions, signaling bearish sentiment and a higher number of traders expecting prices to fall. A deep negative rate can appear during market stress or strong downtrends, as seen when ETH funding rates turned sharply negative during recent volatility events.
Understanding funding rates helps traders gauge market sentiment and crowding, plan entry/exit timing, and manage the cost of holding positions in perpetual futures.
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