Funding rates are one of the most important mechanics to understand before trading perpetual futures, yet they are easy to overlook until they quietly eat into a position. In simple terms, funding rates are periodic payments exchanged directly between traders holding long and short positions, and their job is to keep the perpetual contract's price tethered to the underlying asset. This guide explains what they are, why they exist, and how they affect the cost of holding a trade.
Why funding rates exist
A perpetual future has no expiry date, which is what makes it convenient — you can hold a position indefinitely without rolling into a new contract. But that convenience creates a problem. With no settlement date to force the contract price back toward the spot price, the two could drift apart and stay apart. Something has to keep the perpetual anchored to the real market it is supposed to track.
Funding rates are that anchor. Rather than an exchange stepping in to adjust prices, the mechanism nudges trader behavior. When the contract trades above the underlying, the funding payment flows one way; when it trades below, it flows the other. That flow creates a gentle economic pressure that discourages the gap from widening and encourages it to close.
How the payments work
Funding is exchanged between traders, not paid to the venue. When the funding rate is positive, longs pay shorts; when it is negative, shorts pay longs. The payment is calculated as a rate applied to position size and is settled periodically rather than continuously, so holding through a funding interval is what triggers a payment in or out of your account.
The direction usually reflects which side is more crowded. If demand to be long is pushing the perpetual above spot, longs pay shorts, which raises the cost of being long and rewards taking the other side — pressure that tends to pull the contract back toward the underlying. When the balance flips and the perpetual trades below spot, the flow reverses. In this way funding rates act as a self-correcting force rather than a fixed fee.
Two things follow from this. First, funding is a real, recurring cost or credit, not a rounding detail — over many intervals it can meaningfully change the economics of holding a position. Second, the rate is not constant; it moves as the balance between longs and shorts shifts, so the figure you see now is a snapshot, not a promise about the future.
What funding rates tell you
Beyond their cash effect, funding rates carry information. Because the sign and size of the rate reflect the tug-of-war between longs and shorts, a persistently positive rate hints that positioning is skewed toward the long side, and a persistently negative one hints the opposite. Traders often read funding alongside other data as a rough gauge of crowd sentiment.
