Funding Rate
A periodic payment between perpetual futures traders that helps keep the contract price close to the spot market price.
Funding rate is a mechanism used in perpetual futures, a type of crypto derivative that has no expiry date. Instead of settling on a fixed date, traders periodically pay or receive a small fee based on the difference between the perpetual contract price and the spot price of the underlying asset. When the funding rate is positive, traders who are long usually pay traders who are short. When it is negative, shorts usually pay longs.
It matters because funding can affect the real cost of holding a leveraged position, especially over time. Traders watch the funding rate as a sign of market positioning: a very positive rate may suggest crowded long demand, while a very negative rate may suggest crowded short demand. For example, if Bitcoin spot trades near $60,000 but the perpetual contract is pushed higher by aggressive long buying, a positive funding rate can encourage balance by making longs pay shorts until prices move closer together.
Other terms in Crypto Trading
Basis Trade
A trading strategy that seeks to profit from the price gap between a crypto asset’s spot price and its futures or perpetual contract price.
Leverage Trading
Leverage trading is using borrowed funds to open a larger crypto position than your own capital would normally allow.
Limit Order
An order to buy or sell a cryptocurrency only at a specified price or better.
Long Position
A trade that aims to profit when a crypto asset’s price rises.