A reader once asked about this, so I’ll try to explain it in simple terms.

If you hold a perpetual contract for a while, you may notice your balance changing every few hours. This is called a funding fee. It isn’t a fee charged by the platform; it’s a payment exchanged between long and short traders.

Coin mentioned in this article: $BTC is quoted at 75,100.01 (24h -0.94%).

📌 Why are funding fees needed?

Expiry futures are settled all at once when they expire, so their prices naturally converge toward spot prices. Perpetual contracts have no expiry date, so another mechanism is needed to prevent their prices from straying too far from spot prices over the long term. Funding fees are that mechanism.

When the contract price is above the spot price, the funding rate is usually positive, meaning longs pay shorts and holding a long position becomes more expensive. When the contract price is below the spot price, the rate is usually negative and the direction is reversed. Changes in holding costs can push the contract price toward the spot price.

📌 How it’s calculated and when payments are made

Each funding payment 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 incurs a payment of 1 USDT per interval at a rate of 0.01%.

Only traders holding 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. Individual contracts may also adjust their intervals during periods of extreme market volatility, so check the contract page for details.

📌 How it relates to leverage and holding time

Funding is calculated based on notional value, regardless of the leverage you use. But relative to your margin, higher leverage amplifies the cost: the same 0.01% rate amounts to 0.1% of your margin at 10x leverage.

Each payment is usually small, but the longer you hold a position, the more it adds up. If you plan to hold for several days, factor funding into your holding costs. When comparing contracts, make sure you’re looking at the same settlement interval.

📌 What the rate can tell you

A notably positive rate is often interpreted as meaning that long positions are more crowded; a notably negative rate suggests the opposite. But the rate only reflects the long-short bias in the contract market—it doesn’t indicate the strength of spot buying. Extreme rates can also persist for a long time, so they don’t mean the price will reverse immediately.

📌 In closing

Funding is the “anchor” that keeps perpetual contracts close 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 a clear account of your position. Leave enough room in your position—don’t let a single price spike knock you out.

What do you think? Join the discussion in the comments.