Funding rates are periodic payments between long and short positions on perpetual futures contracts. Unlike traditional futures, perpetual swaps don't expire, so funding rates keep the contract price anchored to the spot price.
When the funding rate is positive, long positions pay shorts. When it's negative, shorts pay longs. The rate is typically paid every 8 hours (3 times per day) on most exchanges.
Why it matters:
High positive funding means longs are expensive to hold (bullish sentiment)
High negative funding means shorts are expensive to hold (bearish sentiment)
Extreme funding rates can signal overleveraged markets and potential reversals
Funding arbitrage strategies profit from rate differences across exchanges
Funding can add up quickly. A 0.05% rate charged three times daily is roughly a 54.8% simple annualized rate if it stayed unchanged for a full year.