Perpetual Futures and Funding Rates
Perpetual futures provide derivative exposure without a fixed expiry date. Funding payments help keep their price connected to the underlying spot market.
Funding is a periodic payment exchanged between long and short perpetual positions. When perpetuals trade above or below their reference price, funding creates an incentive that helps pull the contract back toward spot.
Why Perpetual Futures Exist
Traditional futures contracts expire and settle on a specified date. Perpetual futures remove that expiry, making them convenient for continuous trading.
Without expiry-based convergence, the contract needs another mechanism to stay near the underlying market. Funding helps provide that mechanism.
How Funding Works
At scheduled intervals, one side of the market pays the other.
- When funding is positive, longs generally pay shorts.
- When funding is negative, shorts generally pay longs.
- The exact formula, schedule, cap, and reference price depend on the venue.
Funding is usually exchanged between traders rather than charged as a standard trading fee by the venue.
What Funding Can Suggest
Funding can indicate how aggressively one side is positioned.
| Funding condition | Possible context |
|---|---|
| Moderately positive | Long demand is stronger |
| Extremely positive | Long positioning may be crowded |
| Moderately negative | Short demand is stronger |
| Extremely negative | Short positioning may be crowded |
| Near neutral | Neither side is paying a large premium |
Crowded positioning can continue for a long time. Extreme funding does not guarantee reversal.
Funding Changes Holding Costs
Funding matters more when:
- a position is held through multiple funding intervals;
- the rate is unusually large;
- the strategy has a small expected edge;
- position notional is large;
- the market remains crowded for an extended period.
A trade can move in the expected direction and still underperform after funding and fees.
Funding Is Not the Same as Open Interest
Funding describes payment pressure between sides. Open interest describes how many contracts remain open.
Together they can add context:
- rising OI with positive funding may suggest new leveraged longs;
- rising OI with negative funding may suggest new leveraged shorts;
- falling OI during a move may indicate positions closing.
Advanced Open Interest helps interpret positioning changes. Bender adds spot-versus-perpetual participation context.
Perpetual-Specific Risks
- Liquidation from leveraged exposure.
- Funding costs changing unexpectedly.
- Temporary divergence from spot.
- Venue-specific mark price and liquidation rules.
- Auto-deleveraging or insurance-fund mechanics.
- Exchange and counterparty risk.
Read the exact contract specification before trading.
Key Takeaways
- Perpetual futures do not have a fixed expiry.
- Funding helps keep perpetual prices connected to spot.
- Positive funding usually means longs pay shorts; negative funding reverses that flow.
- Extreme funding indicates crowded positioning, not guaranteed reversal.
- Funding must be included in realistic holding costs.
Continue Learning
- Review spot vs futures.
- Learn what leverage changes.
- Explore Advanced Open Interest.
Perpetual futures can generate rapid losses, liquidation, and recurring funding costs. Rules differ by venue and contract.