Friends who like to trade contracts must understand the funding rate!
The biggest trap in perpetual contracts often comes from the funding rate that settles every eight hours, rather than the apparent handling fees. Many accounts shrink inexplicably because they have been holding out against a one-sided market with a high funding rate for a long time.
The funding rate is a coercive means to anchor the spot price. A positive funding rate means a crowded long position, which must pay fees to the shorts; a negative funding rate means that the shorts pay the longs. This flow of funds only occurs between longs and shorts, and the exchange does not participate in the distribution.
Ignoring the funding rate can lead to serious position erosion. In a bull market, even if the direction is correct, if you continuously pay high interest to the shorts every day, the final profit will be rapidly eroded. Extreme funding rates usually indicate that market sentiment has peaked or bottomed, making them excellent contrarian indicators. Using this mechanism for arbitrage between futures and spot, the risk is much lower than simply betting on price fluctuations.
Since perpetual contracts do not have an expiration date, to ensure that contract prices always closely follow spot prices, exchanges have designed this mechanism.
The positive or negative of the funding rate determines the flow of funds:
• When the funding rate is positive (+):
• Market status: Contract price is above spot price (usually indicates bullish market sentiment, more buyers).
• Capital flow: Longs pay Shorts.
The purpose of doing this is to increase the cost of going long, encouraging short selling, thus pulling the price down to return to the spot price.
• When the funding rate is negative (-):
• Market status: Contract price is below spot price (usually indicates bearish market sentiment, more sellers).
• Capital flow: Shorts pay Longs.
Similarly, the purpose is to increase the cost of short selling, encouraging long positions, thus pushing the price up to return to the spot price.
3 key points about funding rates
1. Fees not paid to the exchange: This money is settled between users, and the exchange does not take a cut (unlike trading fees).
2. Settlement cycle: Most exchanges (such as Binance, OKX, Bybit, etc.) usually settle every 8 hours. You only need to pay or receive this fee if you hold a position at the time of settlement.
Many traders will use funding rates for 'arbitrage between futures and spot'. For example, when the funding rate is very high (positive), buying spot and shorting an equivalent value of contracts can earn the funding paid by longs with almost no risk.
Remember this formula
• If you are long (betting on a rise), when the fee is positive, you need to pay money; when the fee is negative, you will receive money.
• If you are short (betting on a decline), when the fee is positive, you will receive money; when the fee is negative, you need to pay money.
Before opening a position, be sure to confirm the fees and calculate the hidden costs. If you find the content valuable, please like and share. In the future, I will analyze practical signals of divergence between position volume and price, thank you!
