To analyze a funding rate, read four things in order: its sign (positive means longs pay shorts, negative means shorts pay longs), its size compared with the venue's usual baseline, how often it is paid, and whether it comes from one venue or an average across several. The sign shows which side of a perpetual futures market is more crowded and how far the contract trades from spot. It does not show where the price goes next.
What a perpetual funding rate is
A perpetual futures contract has no expiry date. Traders can hold a position for as long as they keep enough collateral, according to Chainlink's explainer on perpetual futures. A dated future converges to spot at expiry. A perpetual never expires, so nothing forces that convergence. Researchers Songrun He, Asaf Manela, Omri Ross and Victor von Wachter make this point in Fundamentals of Perpetual Futures.
The funding rate fills that gap. TradingView's guide to funding rates defines it as a periodic payment between traders who hold perpetual futures positions. Its purpose is to help keep the contract price aligned with the spot price of the underlying asset.
- Positive rate: traders with long positions pay traders with short positions.
- Negative rate: shorts pay longs.
The payment goes from one group of traders to the other. It is not a trading fee charged by the venue.
How the funding rate is calculated
TradingView gives an approximate formula:
Funding rate = interest rate + premium index
- Interest rate: a fixed component for the cost of capital, usually set at the venue's discretion.
- Premium index: the relative premium or discount of the perpetual contract against the underlying index price.
When the perpetual trades above the index, the premium index is positive and pushes the funding rate up. When it trades below, the premium index is negative. TradingView notes that some venues apply proprietary adjustments to this formula, so funding rates usually differ from one venue to another.
He and co-authors describe three such adjustments in the market data they study:
- A clamp region where the rate is fixed at 0.01% per period.
- A weighted average of the premium that gives more weight to recent observations.
- An adjustment for price impact, based on an impact margin notional.
Read the contract specification of the market in front of you before comparing numbers.
Index price and mark price
Two reference prices sit behind the rate:
- Index price: the spot reference that the premium index is measured against.
- Mark price: a value derived from an external index of spot prices. Platforms use it to calculate unrealized profit and loss and to trigger liquidations, per Chainlink.
The last traded price of the perpetual is a separate number. A funding reading tells you about the gap between the contract and its index. It does not replace the mark price that decides margin and liquidation.
How funding is paid
Funding is typically calculated and exchanged every eight hours, though some protocols use a different window, according to Chainlink. In the data used by He et al., funding is paid every 8 hours. The payment roughly equals the average gap between the futures and spot prices over the previous 8 hours.
TradingView expresses the rate as a percentage of the open position, so the payment scales with position size. Here is a worked example with illustrative numbers, not a live quote. A rate of 0.01% on a position worth 10,000 units of a currency is 1 unit per funding period. On an 8-hour schedule there are three periods a day, so that rate repeated for a year adds up to 0.01% × 3 × 365 = 10.95%.
Two consequences follow:
- Annualize before you compare. A rate quoted per hour and a rate quoted per 8 hours are not the same number.
- Time and size multiply the effect. TradingView notes that funding can produce passive gains or additional costs that significantly affect large or long-held positions.
Funding rate: does your side pay or receive?
Pick your position side and the funding rate's sign to see whether you pay or receive, and what the sign suggests about positioning.
Which side of a perpetual futures position do you hold?
- Long → next question
- Short → next question
Is the funding rate positive or negative?
- Positive → Your long position pays
- Negative → Your long position receives
Is the funding rate positive or negative?
- Positive → Your short position receives
- Negative → Your short position pays
With a positive rate, traders with long positions pay traders with short positions. TradingView links a positive rate with stronger long interest and contango.
Source: Funding rate: a guide to market sentiment (tradingview.com)With a negative rate, shorts pay longs. TradingView links a negative rate with stronger short interest and backwardation.
Source: Funding rate: a guide to market sentiment (tradingview.com)With a positive rate, traders with long positions pay traders with short positions. TradingView links a positive rate with stronger long interest and contango.
Source: Funding rate: a guide to market sentiment (tradingview.com)With a negative rate, shorts pay longs. TradingView links a negative rate with stronger short interest and backwardation.
Source: Funding rate: a guide to market sentiment (tradingview.com)It shows payment direction only under TradingView's general rule and does not reflect adjustments a specific exchange may apply.
What positive and negative funding rates signal
TradingView reads the sign as a gauge of market sentiment:
| Reading | Who pays | What it usually reflects |
|---|---|---|
| Positive rate | Longs pay shorts | Perpetual above its index, stronger long interest, contango |
| Negative rate | Shorts pay longs | Perpetual below its index, stronger short interest, backwardation |
| Near the venue's baseline | Small payment either way | Little premium or discount beyond the fixed interest component |
The size of the reading matters as much as its sign. If a venue clamps the rate at a fixed level near zero premium, a reading at that level may only mean the market sits close to its index. A reading well above the baseline means the perpetual trades at a wider premium. Longs pay for that premium in every period while it lasts.
Funding and the futures-spot gap
Research suggests these gaps are larger in crypto than in traditional markets. He et al. find that deviations of perpetual prices from their no-arbitrage benchmark are considerably larger in crypto than in traditional currency markets. The deviations move together across cryptocurrencies and have narrowed over time. The authors also note that funding rates are highly correlated with these deviations by design.
A BIS working paper, "Crypto carry" by Maik Schmeling, Andreas Schrimpf and Karamfil Todorov studies the futures-spot premium directly. It finds that crypto carry varies strongly over time and can become very large, up to 60% a year. The authors link it to trend-chasing demand for leverage from smaller investors and to scarce arbitrage capital. They also find that high carry predicts future price crashes. A persistently high premium, which shows up as persistently positive funding, can therefore point to crowded long positioning. It is a risk reading, not a timing signal.
A checklist for one funding reading
- Sign: positive means longs pay shorts, negative means shorts pay longs.
- Your side: decide whether your position pays or receives at the next settlement.
- Interval: find the funding period for that contract and annualize the rate.
- Baseline: compare the reading with the venue's fixed interest component or clamp level.
- Source: check whether the figure covers one venue or several. TradingView's aggregated funding rate is weighted by open interest, so larger markets move it more.
- Trend: look at several periods in a row, not one print. Funding often changes between settlements.
- Reference prices: keep the mark price and liquidation level in view. Funding changes your margin balance, but the mark price decides liquidation.
What funding rates cannot tell you
A funding rate describes positioning and the contract's premium over its index at a point in time. It does not predict price direction. Readings from different venues are not directly comparable unless their formulas and intervals match. The BIS crash finding links high carry with later crashes on average, not in every case. Arbitrage positions also carry their own risk: the same paper points to spikes in margins and liquidations during drawdowns.
Limitations: the formula details and the 8-hour interval cited here describe typical setups and the data used in the research, not every venue, so check the contract specification before relying on a figure.
Perpetual futures are leveraged derivatives. Prices can move fast, and losses can exceed what a trader expects. This article explains a market mechanism and is not investment advice.
