Funding rate
Why do holders of perpetual futures pay or receive money every few hours, and what does that payment reveal?
In plain words
A funding rate is a regular payment between holders of long and short positions in a perpetual futures contract. When it is positive, longs pay shorts; when it is negative, shorts pay longs. It keeps the contract's price close to the spot price.
Why it matters
Funding is a running cost or income. A positive and rising rate means traders are paying more to stay long, which can point to a crowded side, although the rate alone does not show how large the positions are.
In a real week: BTC, week of 4 March 2024
In the week of 4 March 2024, BTC perpetual funding averaged 0.0475% per eight hours and reached 0.0881%, while BTC closed the week 1.18% below its 52-week high. Longs were paying to hold their positions near the top of the range.
A common mistake
Reading a high funding rate as a signal to sell. It shows the cost of holding a position, not when that position will be closed.