Funding Rates
Perpetual futures donāt expire. Thatās the whole appeal. You can hold your position for as long as you want, until the market proves you wrong or you decide to cash in. But without an expiry date, how do these contracts stay aligned with the spot price?
Thatās where funding rates come in.
What Are Funding Rates?
Funding rates are periodic payments exchanged between long and short traders in perpetual futures markets. They act like a balancing mechanism.
When the perp price trades above the spot price, long traders pay a fee to short traders.
When it trades below the spot price, shorts pay longs.
These payments encourage traders to take the opposite side of an overcrowded trade, helping bring the perp price back in line with reality.
Why They Matter
Funding rates do more than just level pricesāthey also say a lot about what the marketās feeling. A consistently positive rate means longs are dominant and sentiment is bullish. A negative one? Shorts are piling in, and the market might be turning cautious.
The more extreme the rate, the more emotional the market usually is. That makes funding a pretty decent early warning system for when sentiment might be overheating.
How It Works
Every exchange has its own formula for calculating funding rates, but the general idea is this:
Thereās a baseline interest rateāusually something small and stable.
Then thereās a premium index, which tracks the difference between the perpetualās price and the underlying spot price.
If the perpetual price is trading well above spot, the premium goes up, and the funding rate does too. That means longs start paying more to hold their position. At some point, those fees add up, and traders start to close out, helping bring the market back down.
Same story in reverse if perps are trading below spot. Shorts get taxed instead.
Real-World Impact on Your Trading
If youāre holding a perp, funding rates directly impact your PnLāeven if the price doesnāt move an inch. A high positive rate slowly bleeds longs. A negative one wears down shorts. Itās a stealth cost (or reward) that piles up the longer you hold.
This is why smart traders track funding closely, especially during periods of strong trends or high leverage.
Strategy Side Note
Some traders even build strategies around funding:
Hunting carry: Go long spot and short perp when funding is high, and collect the fee. This works best when you expect prices to stay flat.
Mean-reversion plays: When funding gets extreme, take the other side. Markets donāt stay euphoric or fearful forever.
Just remember: none of this is risk-free. High funding usually means high volatility. You might get paid, but youāre also stepping into a fight.
Final Thoughts
Funding rates are one of those mechanics that quietly run the show behind the scenes. They keep perpetuals from drifting into fantasy land, but they also give you a peek into the crowdās mindset.
Whether youāre a casual trader or deep in the weeds, understanding how funding works can help you make better callsāand avoid getting caught paying to hold a losing bag.
About Kuma
Kuma is a double-down bet on what works for decentralized trading: speed, security, and transparency. From the team behind the No.1 DEX from 2017-2019, and powered by Berachainās Proof-of-Liquidity, Kuma delivers one-click onboarding, seamless mobile trading via Kuma Connect, and gas-free settlement. Traders of all sizes have an edge thanks to millisecond execution and complete control of their funds.
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