People often complain there about why the funding rate of a certain coin is so exaggerated, wondering if the exchange is colluding with the market makers to harvest the retail investors.

It makes me want to laugh, not even understanding the basic rules of the game, one must be living with the God of Wealth to lose like that.

The following content is sourced from AI, but it explains very clearly; new contract players must read it all.

The funding rate is a fee periodically exchanged between long and short traders, fundamentally aimed at ensuring that the market price of perpetual contracts is closely anchored to the spot index price.

How is the funding rate charged?

Payment direction: the funding rate can be positive or negative.

Positive rate: contract price > spot price. At this time, long (bullish) traders pay fees to short (bearish) traders.

Negative rate: contract price < spot price. At this time, short traders pay fees to long traders.

Charging mechanism: Charged only to holders: only traders who hold positions at the funding timestamp (usually every 8 hours, e.g., UTC time 00:00, 08:00, 16:00) will pay or receive funding. In extreme cases, it may occur every hour.

Automatic transfer: Fees are not additional cash payments but are directly added or deducted from your position margin. If you are the payer, your position value will slightly decrease; if you are the receiver, your position value will slightly increase.

Calculated based on position value: fee = nominal position value × funding rate. For example, holding a long position of 1 BTC, with BTC priced at $60,000 and a rate of 0.01%, the fee would be 60,000 * 0.0001 = $6.

Factors determining positive or negative funding rates (core mechanism)

The funding rate is primarily determined by a key market phenomenon: the price difference between perpetual contract market prices and spot index prices (premium).

Its calculation formula is usually as follows:

Funding rate = premium index component + interest rate component (usually 0 or very small)

In fact, the premium index components dominate absolutely, which can be simplified as: funding rate ≈ a function used to measure the deviation of contract prices from spot prices.

1. Core factor: premium index

This is the most critical factor determining the positivity or negativity and magnitude of the funding rate.

Premium index = (contract midpoint price - spot index price) / spot index price

The contract midpoint price is the average of the contract buy price and sell price.

The spot index price is the average price of multiple mainstream spot exchanges, used to represent a fair spot price.

Operational logic:

When the market is extremely bullish (FOMO): a large number of traders open long contracts, pushing up contract prices above the spot index price → the premium index is positive → the funding rate becomes positive.

Effect: The system makes longs pay fees to shorts to 'punish' overly crowded long positions, encouraging some longs to close positions or attracting new shorts to open positions, thus causing contract prices to fall closer to spot prices.

When the market is extremely bearish: a large number of traders open short contracts, pushing down contract prices below the spot index price → the premium index is negative → the funding rate becomes negative.

Effect: The system makes shorts pay fees to longs to 'punish' overly crowded short positions, encouraging some shorts to close positions or attracting new longs to open positions, thus causing contract prices to rise closer to spot prices.

Simple memory: Contract price is higher than spot price, long pays (positive rate); contract price is lower than spot price, short pays (negative rate).

2. Contributing factors: interest rate component

This part is usually very small (for example, 0.01% or 0), representing the theoretical interest differential of holding cash assets. In the cryptocurrency market, its impact is negligible, and the main role is still the aforementioned premium balance mechanism.

Summary and analogy

Purpose: It is not a fee charged by the exchange, but an automatic balancing mechanism of the market, like an 'anchor rope' pulling the contract price vessel back near the anchor point of the spot price.

Decisive factor: The price difference between contracts and spot caused by market sentiment. The larger the price difference, the greater the absolute value of the funding rate, and the stronger the balancing force.

Significance for traders:

Cost consideration: If you are the payer, frequent funding fee payments will significantly erode profits (especially when rates are very high).

Strategy basis: A very high positive rate may indicate an overheated market (bulls should be cautious), while a very low negative rate may indicate excessive pessimism in the market (bears should be cautious). Some 'arbitrage' strategies will try to profit from the funding rate.

Position reminder: Long-term holdings must consider the funding rate as part of the holding cost.

You can think of it as an automatic adjustment system: the funding rate is the adjustment signal, and the buying and selling behavior of market participants is the actuator, with the common goal of keeping the perpetual contract price in line with the spot price.

The above concludes the main text.

To add, in the current harvesting route of altcoins, the funding fee is a crucial part. Looking back at the altcoins from the second half of this year, former myx and coai are now following the same pattern as beat, pippin, and folks.

This means that the market maker holds a large portion of the spot chips, and the shorts cannot push down the spot price, allowing the market maker to easily control whether the funding fee is positive or negative. The spot held by the market maker does not need to be directly sold in the secondary market; profits can be harvested directly through the contract funding fee.

When encountering coins that charge fees every hour, remember this: cherish life, stay away from altcoins!