Funding Rate (Perpetual Futures)

The funding rate is a periodic payment exchanged between traders holding long and short positions in a perpetual futures contract. When the contract trades above the spot price of the underlying asset, longs pay shorts; when it trades below, shorts pay longs. The payment gives traders a reason to push the contract's price back toward spot, which matters because a perpetual contract never expires.

Funding rates are a feature of crypto derivatives venues, both centralized exchanges and on-chain platforms such as Hyperliquid and dYdX. The rate is paid by traders to each other, not to the exchange, and is separate from trading fees. It should not be confused with the cost of borrowing on margin or with the basis of a dated futures contract, which closes at expiry.

Imagine a concert ticket that can be resold forever and never reaches the night of the show. Nothing forces its resale price to match the box-office price, so it could drift far away. Now add a rule: every few hours, whoever holds a ticket that is priced above the box office pays a small fee to people betting it will fall, and the reverse when it is priced below. Holding the overpriced side becomes expensive, so people sell it, and the price drifts back.

The funding rate is that fee. When many traders are eager to bet on a rise, the fee for doing so climbs, which cools enthusiasm. When the crowd turns gloomy, the fee flips and starts rewarding the optimists.

Most large venues use a version of the formula introduced by BitMEX, combining a premium component and a small interest component. Hyperliquid's documentation, for example, states it as:

• $F$ is the funding rate for the period, often quoted per 8 hours.
• $P$ is the premium index, the average gap between the contract price and the spot or index price, as a share of the index price.
• $I$ is the interest rate component, commonly fixed at 0.01\% per 8 hours.
• $\text{clamp}$ limits the interest adjustment to a band, here plus or minus 0.05\%.

The payment for each position is its notional amount times the funding rate. Suppose the premium index averages 0.03\% over a period. Then $I - P = 0.01\% - 0.03\% = -0.02\%$, which sits inside the band, so $F = 0.03\% - 0.02\% = 0.01\%$. A trader long 100,000 dollars of Bitcoin perpetuals pays $100{,}000 \times 0.0001 = 10$ dollars to the short side for that period. If the premium jumps to 0.20\%, the clamp leaves $I - P$ at $-0.05\%$, so $F = 0.15\%$ and the same long pays 150 dollars.

BitMEX launched its XBTUSD perpetual swap on 13 May 2016, offering up to 100 times leverage on Bitcoin with no expiry date, and used a funding mechanism to tie the contract to the spot index. The design spread across the industry and perpetuals became the most traded crypto derivative. Funding intervals vary: BitMEX pays every 8 hours, Binance uses 8 hours for many contracts but shorter intervals for some, and Hyperliquid pays every hour, at one-eighth of an 8-hour rate. In September 2025 Binance changed its formula to use an average premium index and to scale the rate for intervals shorter than 8 hours.

Because the rate reflects how far traders are willing to pay above spot, it is widely read as a gauge of sentiment and leverage in the market:

• Persistently positive funding. Longs are crowded and paying to stay in, which can precede sharp falls if prices turn and leveraged longs face a margin call.
• Negative funding. Shorts dominate, often after a sell-off, and are paying longs to hold their positions.
• Funding near the baseline. Demand on both sides is balanced and the rate sits close to the interest component alone.

Traders also run a "cash-and-carry" or basis trade: buy the spot asset and short the perpetual, collecting funding while the price exposure cancels out. The same structure underpins some synthetic dollar products that hold crypto and short perpetuals. It is a form of arbitrage, but the income disappears when funding turns negative.

Funding can change quickly and is charged on the full position, so a highly leveraged trader can see a large share of their margin consumed by funding alone. The rate depends on the venue's index and premium calculation, and an unreliable price feed can distort it. Funding also does not stop the contract price from diverging in a crash; on 10 October 2025, when roughly 19 billion dollars of positions were liquidated in a day, prices on some venues moved far from spot regardless. Large moves often end in forced liquidation, which is why margin and funding are monitored together.

• BitMEX: Announcing the Launch of the Perpetual XBTUSD Leveraged Swap
• Hyperliquid Docs: Funding