Funding as sentiment
What does the sign of a perpetual funding rate actually reveal about which side of the market is crowded?
In plain words
Funding is a regular payment between long and short holders of a perpetual futures contract. A positive rate means longs pay shorts, which usually appears when traders are leaning long. The sign shows who is paying to hold their position, which is a hint at crowding, not proof of future direction.
Why it matters
A positive funding rate says the cost of being long is real, and that someone is paying it. That helps a risk-taker judge which side is crowded and how expensive the position has become to maintain, but it cannot say whether the price will rise or fall.
In a real week: ETH, week of 29 March 2021
In the week starting 29 March 2021, ETH's 8-hour funding stayed positive throughout, averaging 0.0798%, peaking at 0.1569% and bottoming at 0.022%, while ETH returned 23.03% and closed 2.72% below its 52-week high. Longs were paying for the whole week; ETH still returned 23.03%, though it fell 5.87% on its worst day, 2021-04-03. The sign marked the crowded side; it did not forecast the week's path.
A common mistake
Treating high positive funding as a sell signal. It marks the side that is crowded and paying, but crowded positions can run for a long while before they unwind.