What Is a Funding Fee? Ever Had a Profitable Position Completely Eroded by Funding Fees?
In crypto derivatives trading, funding fees are the hidden cost many traders underestimate — until it’s too late.
A funding fee is a recurring payment exchanged between long and short traders in perpetual futures contracts. Its purpose is simple: keep the futures price closely aligned with the spot market. But its impact on your PnL can be brutal.
When funding is positive, traders holding long positions pay shorts. When funding turns negative, shorts pay longs. These payments usually happen every 8 hours, meaning you can pay the fee multiple times a day just for holding a position open.
Here’s where traders get trapped: Your trade can be right on direction, price can move slowly in your favor — yet your profit keeps shrinking. Why? Because crowded positioning drives funding rates higher, and the market charges you for staying in that trade.
In extreme cases, funding fees alone can wipe out gains, forcing traders to close positions early or get liquidated without a major price move. Historically, very high funding rates often signal an overheated market and tend to precede sharp reversals or liquidation cascades.
Smart traders don’t ignore funding. They trade with it.
Tracking funding rates helps identify overcrowded trades, potential reversals, and moments when patience becomes expensive.
In today’s market, funding fees aren’t just a cost — they’re a warning signal.