Funding rate

The funding rate is a periodic payment between traders holding long and short positions in perpetual futures. It keeps the perpetual's price anchored to the underlying spot price.

When the perpetual trades above spot, funding is positive and longs pay shorts. When it trades below, funding is negative and shorts pay longs. On most exchanges funding is exchanged every eight hours, though some settle hourly, and the payment is a percentage of your position size. A rate of 0.01% per eight hours works out to roughly 11% a year, so holding a large leveraged position for weeks can be expensive.

Traders watch funding as a sentiment indicator. Persistently high positive funding suggests the market is crowded with leveraged longs, which can precede sharp drops as they are liquidated. Deeply negative funding can signal heavy shorting and the potential for a short squeeze. Some traders earn funding through "cash and carry" or basis trades, holding spot and shorting the perp.