Funding rates are periodic payments between long and short perp traders. They help keep a perpetual futures contract close to the price of the underlying asset, since perps do not have an expiry date.
Funding is one of the first mechanics every perp trader should understand because it can quietly add cost to a position that looks fine on price alone.
Who pays funding?
When a perp trades above the underlying index, long demand is usually stronger than short demand. Funding often becomes positive, which means longs pay shorts. When a perp trades below the index, funding often becomes negative, which means shorts pay longs.
The venue typically routes funding between traders. It is not the same thing as a trading fee.
Why funding exists
Traditional futures converge with spot because they expire. Perps do not expire, so funding creates an economic incentive for the contract to stay near the underlying price. Expensive positive funding can attract shorts and discourage new longs. Expensive negative funding can attract longs and discourage new shorts.
Funding can change
Funding is not fixed. It can flip from positive to negative as market positioning changes. During a crowded meme coin rally, longs may pay high funding. During a panic dump, shorts may pay high funding.
If you hold a position for multiple funding intervals, those payments can add up.
How to use funding as context
- High positive funding can mean longs are crowded.
- High negative funding can mean shorts are crowded.
- Funding alone is not a trade signal.
- Always compare funding cost with your expected trade duration.
A short-term scalp may barely notice funding. A multi-day leveraged position can feel it.
Risk note: Funding can change your PnL even if the market price barely moves. This article is educational content, not financial advice.