I’ve been meaning to write about this for a while, and finally had some time to do it.
If you hold a perpetual contract for a while, you may notice that your balance changes every few hours. This is called a funding fee. It isn’t a fee collected by the platform, but a payment exchanged between long and short traders.
Coin mentioned in this article: $BTC quoted at 83,228 (24h +1.94%).
【Why funding fees are necessary】
Futures contracts are settled all at once when they expire, so their prices naturally converge with spot prices. Perpetual contracts have no expiry date, so another mechanism is needed to keep their prices from diverging from spot prices for too long. Funding fees serve this purpose.
When the contract price is higher than the spot price, the funding rate is usually positive, meaning longs pay shorts and holding a long position becomes more costly. When the contract price is lower than the spot price, the rate is usually negative and the payment direction is reversed. Changes in holding costs help bring the contract price closer to the spot price.
【How it’s calculated and when payments are made】
The funding payment for each interval equals the position’s notional value multiplied by the funding rate. Notional value is calculated using the mark price. For example, a position with a notional value of 10,000 USDT at a funding rate of 0.01% will pay or receive 1 USDT per interval.
Only traders who still hold a position at the settlement time pay or receive funding. If you close your position before settlement, no funding payment applies. Settlement intervals vary by contract: some settle every 8 hours, others every 4 hours. During volatile market conditions, the interval for certain contracts may also be adjusted. Check the contract page for details.
【How it relates to leverage and holding time】
Funding is calculated based on notional value and is not affected by the leverage you use. However, relative to your margin, higher leverage magnifies the impact: the same 0.01% rate amounts to 0.1% of your margin at 10x leverage.
The payment for a single interval is usually small, but it adds up the longer you hold a position. If you plan to hold for several days, it’s best to factor funding into your holding costs. When comparing different contracts, make sure to compare them over the same settlement interval.
【What the rate can tell you】
A notably positive rate is often interpreted as indicating that long positions are more crowded; a notably negative rate suggests the opposite. But the rate only reflects the balance of long and short positions in the contract market. It doesn’t indicate the strength of spot buying, and an extreme rate can persist for a long time—it doesn’t mean the price will reverse immediately.
【In closing】
Funding is the “anchor” that keeps perpetual contracts tied to the spot price, and it’s also part of the cost of holding a position. Knowing who pays whom, when payments are made, and how they’re calculated helps you keep track of your costs. After a loss, don’t immediately double down to try to win it back—that often just leads to even bigger losses.
What was the first situation that helped you understand this?