What Are Funding Rates?
Funding rates are periodic payments exchanged between long and short traders in cryptocurrency perpetual contracts. These rates help maintain price equilibrium between the contract and its underlying asset by incentivizing traders to balance the market.
Key Characteristics:
- Primarily used in perpetual futures contracts (no expiry date)
- Positive rate: Longs pay shorts (bullish market)
- Negative rate: Shorts pay longs (bearish market)
- Typical range: -0.375% to +0.375% for Bitcoin (varies by exchange)
How Funding Rates Work
Exchanges use funding rates as a mechanism to:
- Align prices: When perpetual contracts deviate from spot prices
- Balance positions: Encourage traders to take opposing positions
- Adjust costs: Compensate traders holding contra-trend positions
Market Conditions:
- Bull markets: Rising positive funding rates
- Bear markets: Increasing negative funding rates
Calculating Funding Fees
Funding fees are calculated using this formula:
Funding Fee = Position Notional Value × Funding RateWhere:
- U.S. Dollar-Margined Contracts:
Notional Value = Mark Price × Contract Quantity - Coin-Margined Contracts:
Notional Value = Contract Multiplier × Contract Quantity / Mark Price
Settlement Times:
- Typically every 8 hours (e.g., 08:00, 16:00, 24:00 UTC+8)
- Some exchanges settle hourly
- Only charged when holding positions at settlement
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Factors Determining Funding Rates
Funding rates consist of two components:
Interest Rate
- Fixed at 0.01% per 8-hour period (0.03% daily)
- Assumes higher interest for cash holdings vs. crypto
Premium Index
- Measures divergence between contract and spot prices
Calculated as:
P = [Max(0, Impact Bid Price - Price Index) - Max(0, Price Index - Impact Ask Price)] / Price Index
Key Terms:
| Term | Definition |
|---|---|
| Impact Bid Price | Average price when buying reaches Impact Margin Notional |
| Impact Ask Price | Average price when selling reaches Impact Margin Notional |
| Price Index | Weighted average of spot prices across major exchanges |
| IMN | 200 USD worth of trading power at maximum leverage |
Advanced Concepts
Impact Margin Calculation
For:
- USD-Margined Contracts: IMN = 200 USDT / Initial Margin Rate
Example: BTCUSDT at 125x leverage (0.8% margin):
IMN = 200 / 0.008 = 25,000 USDT - Coin-Margined Contracts: IMN = 200 USD / Initial Margin Rate
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FAQ Section
Why do funding rates exist?
Funding rates prevent perpetual contract prices from deviating too far from spot prices by financially incentivizing traders to balance the market.
How often are funding rates paid?
Most exchanges settle every 8 hours, though some use hourly intervals. Payments occur only if you hold a position at settlement time.
Can funding rates be predicted?
While difficult to predict precisely, monitoring market sentiment and premium indices can help anticipate rate directions.
What happens if I close my position before funding time?
No funding fees are paid/received if your position is closed before the settlement window.
Why do funding rates vary across exchanges?
Differences in liquidity, trading volume, and calculation methodologies cause variations between platforms.