Mastering Funding Rates
What is Funding Rate
Funding rate is the periodic fee exchanged between long and short positions to keep perpetual futures prices anchored to spot prices.
Perpetual futures have no expiration, so a mechanism is needed to prevent prices from diverging from spot. The funding rate serves this purpose.
- Futures price > Spot price: Positive funding rate (+). Longs pay shorts
- Futures price < Spot price: Negative funding rate (-). Shorts pay longs
As the paying side reduces positions, prices converge toward spot.
Funding Rate Calculation
Components
Funding rate consists of two components.
Funding Rate = Interest Rate + Premium Index
- Interest Rate: Difference between base currency (USD) and underlying asset (BTC, etc.) interest rates. Usually fixed at 0.01%
- Premium Index: Reflects the divergence between perpetual futures price and spot index price
In practice, funding rate fluctuations are mostly determined by the premium index. The more expensive futures are relative to spot, the higher the premium index and funding rate.
Settlement Schedule
| Exchange | Settlement Period | Settlement Times (UTC) |
|---|---|---|
| Binance | 8 hours | 00:00, 08:00, 16:00 |
| Bybit | 8 hours | 00:00, 08:00, 16:00 |
| OKX | 8 hours | 00:00, 08:00, 16:00 |
| dYdX | 1 hour | Every hour |
You must hold a position at settlement time to pay or receive funding. You can avoid funding by closing positions just before settlement and reopening just after, but trading fees and slippage must be considered.
Payment/Receipt Amount
Funding Amount = Position Size (Notional Value) x Funding Rate
Example: 10x leverage, $100,000 BTC long position, 0.03% funding rate
- Payment amount = $100,000 x 0.03% = $30 (per 8 hours)
- 3 times daily = $90
- Monthly (30 days) = $2,700
Higher leverage means larger position size, so funding costs increase proportionally.
Interpreting Funding Rates
Positive Funding Rate (+)
Longs pay shorts. This means long positions dominate the market.
| Funding Level | Per 8 Hours | Meaning |
|---|---|---|
| 0.005-0.01% | Low positive | Normal range. Slight long bias |
| 0.01-0.05% | Moderate positive | Healthy bullish sentiment |
| 0.05-0.1% | High positive | Long crowding. Caution needed |
| Above 0.1% | Extreme positive | Extreme overheating. Reversal warning |
Negative Funding Rate (-)
Shorts pay longs. This means short positions dominate the market.
| Funding Level | Per 8 Hours | Meaning |
|---|---|---|
| -0.005 to -0.01% | Low negative | Slight short bias |
| -0.01 to -0.05% | Moderate negative | Bearish sentiment. But short squeeze possible |
| Below -0.05% | Extreme negative | Extreme fear. Bounce possible |
Relationship Between Funding Rate and Price
Funding Rate as a Contrarian Indicator
Funding rate shows the consensus direction of market participants. However, when the majority crowds into one direction, price often moves the opposite way.
| Funding Rate | Price Reaction | Reason |
|---|---|---|
| Extreme positive | Decline possible | Longs overcrowded. Even slight declines trigger cascade liquidations leading to crashes |
| Extreme negative | Rise possible | Shorts overcrowded. Even slight rises trigger short squeeze leading to surges |
Short Squeeze
When funding rate is extremely negative and price rises:
- Short positions incur losses
- Some shorts force-liquidated, triggering forced buys
- Price rises further
- More shorts liquidated, chain reaction
- Price surges (short squeeze)
Long Squeeze
When funding rate is extremely positive and price falls, the opposite chain reaction occurs.
Funding Rate Patterns
Funding Rate in Bull Markets
In bull markets, funding rates are often persistently positive due to consistent long demand.
- Healthy bull: Funding rate 0.01-0.03%. Moderate long bias
- Overheated bull: Funding rate 0.05%+ sustained. Correction probability increases
- Bull market peak: Funding rate spikes above 0.1% then crashes. Large-scale liquidations occur
Funding Rate in Bear Markets
In bear markets, funding rates often turn negative or hover near 0.
- Early bear: Funding rate drops from positive to 0
- Full bear: Funding rate stays negative
- Bear market bottom: Extreme negative funding. Bounces when everyone is short
Funding Rate in Sideways Markets
In sideways markets, funding rate fluctuates near 0. When funding suddenly surges in one direction from this state, it may signal a breakout.
Using BitInsight's Funding Rate Panel
BitInsight's derivatives panel provides real-time funding rates for Binance USDT perpetual futures.
Available Information
- Current funding rate: Positive (longs pay) / Negative (shorts pay)
- Countdown to next settlement: Useful for managing settlement timing
- 8 major coins: BTC, ETH, SOL, XRP, DOGE, ADA, AVAX, LINK
Practical Scenarios
Scenario 1: BTC funding rate above 0.08%
- Longs are overcrowded
- Avoid new long entries
- Consider reducing existing long positions
- Explore short opportunities (after confirming with other indicators)
Scenario 2: BTC funding rate below -0.05%
- Shorts are overcrowded
- Short squeeze possible
- Look for spot buying opportunities
- If open interest is also high, squeeze intensity is greater
Scenario 3: Only altcoin funding rates spike
- Speculation concentrated in altcoins
- Altcoin correction possible
- BTC dominance may rise
Cross-Coin Funding Rate Comparison
Comparing funding rates across coins at the same time reveals where capital is flowing.
- BTC funding < Altcoin funding: Speculative demand concentrated in altcoins. "Alt season" atmosphere
- BTC funding > Altcoin funding: Demand concentrated in BTC. Safe-haven preference
- All coins extreme positive funding: Market-wide overheating. Major correction warning
BitInsight allows comparing funding rates across 8 coins at a glance, enabling quick identification of cross-coin funding divergence.
Funding Rate Arbitrage
Basic Structure
When funding is high, simultaneously opening spot long + futures short generates funding income regardless of price direction.
- Buy 1 BTC spot ($100,000)
- Short 1 BTC futures ($100,000)
- If price rises: Spot profit + Futures loss = Offset
- If price falls: Spot loss + Futures profit = Offset
- Only funding income remains
At 0.05% funding rate, this generates $50 every 8 hours, $150 daily. This strategy is covered in detail in hedging strategies.
Cautions
- Trading fees (entry/exit) may exceed funding income
- If funding turns negative, costs are incurred instead
- Liquidation risk from mark price fluctuations on futures short position
Combining with Other Indicators
Funding Rate + Open Interest
When open interest is high and funding is extreme, fuel for a major squeeze is accumulated. If OI is low, even high funding limits squeeze intensity.
Funding Rate + Long/Short Ratio
When long/short ratio aligns with funding direction, the signal is reinforced. Positive funding + long-dominant ratio = stronger overheating signal.
Funding Rate + RSI
When RSI is overbought and funding is also extremely positive, both technical and derivatives indicators are warning simultaneously, requiring caution.
Summary
Funding rate is a key indicator showing the balance of power between longs and shorts in the perpetual futures market. Extreme positive values suggest long crowding and downside risk, while extreme negative values suggest short crowding and bounce potential. Monitor funding rates for 8 coins in real-time on BitInsight to assess market overheating/cooling, and combine with open interest and long/short ratio for more accurate market assessment.
Next article: Open Interest Analysis - The Scale of Bets in the Market