In traditional finance, futures contracts have an expiration date. On that day, futures prices must match spot prices. But in cryptocurrencies, we mainly trade perpetual contracts. They never expire. So what prevents the price of Bitcoin futures from soaring to $100,000 while the spot price of Bitcoin is $50,000? The answer lies in the funding rate.
🔸 The funding rate is a periodic payment, usually every 8 hours, exchanged between long and short positions to keep the futures price tethered to the spot price. The exchange does NOT charge this fee; it happens between equal participants.
Positive funding rate:
Bull market. Too many long positions. Futures price > Spot price.
The system forces long positions to pay shorts.
Discourage long positions and encourage shorts to bring the futures price down to the spot price level.
Negative funding rate:
Bear market. Too many short positions. Futures price < Spot price.
The system forces short positions to pay longs.
Encourage opening long positions to raise the futures price.
🔸 Risk-free strategy:
This is how large funds make money. It's not for inexperienced people.
Assuming the funding rate is very high 0.1% every 8 hours = 109% APY.
Step 1 buy 1 BTC on the spot market.
Step 2 open a short position of 1 BTC on the futures market.
Result:
Regardless of whether the BTC price goes up or down, the PnL of these two positions offset each other. You are not exposed to price volatility.
But every 8 hours you rest and collect the funding fee paid by long positions.
🔹 Furthermore, the funding rate is a powerful indicator of sentiment.
If the funding is extremely positive 👉 People are too greedy 👉 High risk of a long squeeze.
If the funding is extremely negative 👉 People are afraid 👉 High risk of a short squeeze.
Do you check the funding rate before holding a position overnight?
News is for informational purposes only and not investment advice. Please read carefully before making decisions.
