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Funding rates are a core mechanic of crypto perpetual futures trading, yet they’re often misunderstood by newer traders. While they may look like a small recurring fee, funding rates play a major role in keeping futures prices aligned with the spot market and can significantly impact your profitability over time.
This article explains what funding rates are, how they work, and why they matter for anyone trading perpetual futures.
Understanding Perpetual Futures Contracts
Perpetual futures contracts are derivatives that allow traders to speculate on the price of cryptocurrencies without owning the underlying asset. Unlike traditional futures, they do not have an expiration date. Positions can be held indefinitely, as long as margin requirements are met.
Because perpetual contracts never expire, exchanges need a mechanism to keep their prices close to the spot market. That mechanism is the funding rate. Without it, perpetual prices could drift far away from the real market value.
What Is a Funding Rate?
A funding rate is a periodic payment exchanged directly between traders who are holding long and short positions in a perpetual futures market. The exchange itself does not collect this fee; it is transferred from one side of the market to the other.
When the funding rate is positive, traders holding long positions pay a fee to traders holding short positions. When the funding rate is negative, short positions pay longs. This payment incentivizes traders to take positions that help bring the futures price back in line with the spot price.
In simple terms, funding rates act as a balancing force that keeps perpetual futures tethered to the real market price of the asset.

Why Funding Rates Exist
If a perpetual futures contract trades above the spot price, it usually means there is strong demand to go long. A positive funding rate makes holding long positions more expensive, encouraging some traders to close longs or open shorts instead.
If the futures price trades below the spot price, funding rates often turn negative. This makes short positions more expensive to hold and incentivizes traders to go long.
Over time, this push and pull helps maintain price alignment between futures and spot markets.
How Funding Rates Are Calculated
Funding rates are typically made up of two components: an interest rate and a premium index.
The interest rate reflects the relative cost of holding the base asset versus the quote currency. In crypto markets, this value is usually small and relatively stable.
The premium index measures the difference between the perpetual futures price and the spot index price. When futures trade at a premium, the index is positive. When they trade at a discount, it becomes negative.
Each exchange uses its own formula to combine these components, so funding rate calculations can vary slightly across platforms.
Funding Rates on Binance Futures
On Binance, funding rates are settled every eight hours. The platform uses a fixed daily interest rate that is split into three funding intervals.
Traders can view the current funding rate and the countdown to the next settlement directly in the Binance Futures trading interface. This transparency allows traders to anticipate upcoming funding payments before opening or holding positions.
Understanding how funding works on your chosen exchange is essential, especially when holding positions over multiple funding intervals.

Why Funding Rates Matter to Traders
Funding rates affect more than just small fees. Over time, they can meaningfully change a trade’s outcome.
Holding a position during periods of high funding can become costly, particularly for leveraged traders or those maintaining positions for days or weeks. In some cases, funding fees can exceed trading fees or even wipe out profits.
Funding rates also provide insight into market sentiment. Persistently positive funding often signals bullish positioning, while consistently negative funding can reflect bearish pressure or aggressive shorting.
Some advanced traders use funding rates as part of arbitrage or hedging strategies, seeking to capture funding payments while minimizing price risk.
Funding Rates and Risk Management
Monitoring funding rates is an important part of managing risk in perpetual futures trading. Sudden spikes often occur during periods of extreme market optimism or panic, increasing the cost of holding positions.
Traders should factor funding into position sizing, holding duration, and leverage decisions. Ignoring funding rates can lead to unexpected losses, even when price moves in the right direction.
Final Thoughts
Funding rates are a foundational element of crypto perpetual futures markets. They keep futures prices aligned with spot markets, redistribute costs between longs and shorts, and offer valuable signals about market positioning.
Whether you trade short-term or hold positions longer, understanding funding rates helps you make more informed decisions and avoid hidden costs. In volatile markets, awareness of funding can be just as important as predicting price direction.
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