Module 7: Perpetual Futures
Funding Rates, the Rent You Pay to Stay in a Trade
Chapter 7 of 14 · about 7 minutes
7.1 Right about direction, still losing
Mint opened a long BTC perp, expecting a rally. For ten days, Bitcoin drifted sideways, ending almost exactly where Mint had entered. Mint closed the position, expecting to break even.
Instead, Mint had lost 9% of the margin.
"The price didn't move," said Mint. "Where did the money go?"
"Rent," said Hash. "You were paying funding every eight hours, the whole time. In a crowded market, that adds up fast."
7.2 The missing anchor
In Chapter 2, we saw that a traditional futures contract has an expiry date. On that date, the futures price and the spot price meet, because the contract settles against the actual underlying asset. Expiry is the anchor.
Perpetual futures removed that anchor (Chapter 3). So what stops the perp price from drifting far away from the real price of Bitcoin? If everyone is bullish and keeps buying perps, the perp could trade at $105,000 while Bitcoin on the spot market sits at $100,000.
The answer is the funding rate. It's the mechanism that does the job expiry used to do, and understanding it will change how you think about holding leveraged positions.
7.3 How funding works
At regular intervals, traders on one side of the market pay traders on the other side. The exchange doesn't collect this money; it moves directly between longs and shorts.
The direction depends on where the perp price sits relative to the index price (Chapter 6).
When the perp trades above the index, the funding rate is positive, and longs pay shorts. This makes it expensive to be long and rewarding to be short. Some longs close, some traders open shorts to collect the payments, and the perp price gets pushed back down toward spot.
When the perp trades below the index, the funding rate is negative, and shorts pay longs. The pressure works in reverse, pulling the perp price back up.
Think of it like rent in a popular neighbourhood. When everyone wants to live there (everyone wants to be long), rent goes up. Some people move out, and the people who own the buildings (the shorts) collect. When the neighbourhood falls out of fashion, the situation flips.
Most large exchanges settle funding every 8 hours, though some use 4-hour intervals and some settle hourly. The interval matters for your maths, so always check the contract specifications (Chapter 3).
Chapter 7 · How funding payments work
When the perpetual trades above the index, longs pay shorts a funding payment every interval; when below, shorts pay longs. The payment is calculated on the full notional position, not the posted margin, so at high leverage a small funding rate becomes a large percentage of your capital.
7.4 How the rate is set
Exact formulas vary by exchange, but most share the same two ingredients:
| Component | What it reflects |
|---|---|
| Premium | How far the perp price is above or below the index, averaged over the funding period |
| Interest component | A small baseline reflecting the difference in borrowing costs between the stablecoin and the asset |
When the perp trades close to the index, funding typically sits at a default baseline, often around 0.01% per 8 hours on many exchanges. When the perp trades at a large premium, funding rises. Most exchanges also cap how high or low funding can go in each period.
7.5 The number that catches people out
Here's the part most beginners miss. Funding is calculated on your position's full notional value, not on the margin you put up.
Let's look at Mint's trade. With BTC at $100,000, Mint opened a long position of 0.5 BTC using 10x leverage.
| Item | Value |
|---|---|
| Position size | 0.5 BTC |
| Notional value | $50,000 |
| Margin posted (10x) | $5,000 |
| Funding rate | 0.03% per 8 hours |
| Funding intervals per day | 3 |
The market was excited, and funding was running at 0.03% every 8 hours, three times the baseline. That sounds tiny. Here's what it cost.
Funding per interval = $50,000 × 0.03% = $15
Funding per day = $15 × 3 = $45
Over 10 days = $45 × 10 = $450
Now compare that to the money Mint actually had at risk. $450 is 9% of the $5,000 margin, paid in just 10 days, with Bitcoin going nowhere.
Annualised, 0.03% × 3 × 365 is roughly 33% per year on the notional value. Because Mint used 10x leverage, the cost relative to Mint's own capital is ten times larger. Holding this position for a year at this funding rate would consume the margin several times over.
| Funding rate per 8 hours | Annualised on notional | Annualised on margin at 5x | Annualised on margin at 10x |
|---|---|---|---|
| 0.01% (common baseline) | ~11% | ~55% | ~110% |
| 0.03% | ~33% | ~164% | ~329% |
| 0.10% (very heated) | ~110% | ~548% | ~1,095% |
This is why a trader can be right about direction and still lose money. If the thesis takes a month to play out and funding stays elevated, the rent can eat most of the profit before the move arrives.
"So high leverage doesn't just bring liquidation closer," said Mint. "It multiplies the rent too."
"Exactly," said Hash. "Leverage multiplies everything."
7.6 Negative funding
Funding cuts both ways. During fearful markets, funding often turns negative, and shorts pay longs.
| Position | Funding rate | Effect |
|---|---|---|
| Long 1 BTC ($100,000 notional) | −0.02% per 8 hours | Mint receives $20 per interval, $60 per day |
| Short 1 BTC ($100,000 notional) | −0.02% per 8 hours | The short pays $20 per interval |
Persistently negative funding means shorts are crowded and willing to pay to stay short.
7.7 What funding tells you about the market
Funding is a cost, but it's also information. It's one of the cleanest real-time measures of how traders are positioned (Module 4, Chapter 15).
Persistently high positive funding means many traders are long with leverage and willing to pay to stay that way. This often happens near local tops. It doesn't mean the price must fall, but it does mean the market is crowded on one side, and crowded trades are fragile. A sharp dip can trigger liquidations, which force more selling, which triggers more liquidations (Chapter 8).
Deeply negative funding means shorts are crowded. This often appears after a sharp sell-off when fear is high. The same fragility applies in reverse: a sudden bounce can force shorts to buy back, producing a short squeeze.
Funding near the baseline suggests a reasonably balanced market without extreme positioning.
A useful habit: before opening any leveraged position, check the current funding rate and its recent history. If you're about to join the side that's already paying heavily, ask yourself what you know that the crowd doesn't.
7.8 Funding timing
On exchanges with fixed funding times, you generally pay or receive funding only if you hold a position at the exact funding timestamp. Some traders open or close positions around these times to avoid paying. Exchanges that settle funding hourly, or continuously, make this less relevant.
Funding also varies across exchanges. The same asset can have quite different funding on different venues, which creates opportunities for arbitrage traders, covered in Chapter 12.
7.9 Try it yourself
Open a perp trading interface on a testnet or with a paper trading account, and find the funding rate for the BTC perpetual. Note three things: the current rate, the time until the next funding payment, and the funding interval. Then calculate what a $10,000 notional position would pay or receive per day at that rate, and what that would be as a percentage of margin at 5x leverage. Check your answer against the exchange's funding history page.
Finally, compare today's BTC funding rate across three exchanges.
Key takeaways from this chapter
- Perpetual futures have no expiry, so funding rates keep the perp price close to the index.
- When funding is positive, longs pay shorts; when negative, shorts pay longs. The exchange doesn't keep the payment.
- Funding is set from the perp's premium to the index plus a small interest component, often with a baseline around 0.01% per 8 hours.
- Funding is charged on full notional value, so leverage multiplies its cost relative to your margin.
- A small-looking rate like 0.03% per 8 hours compounds into a large cost over days and weeks.
- Extreme funding in either direction signals crowded positioning and higher risk of sharp reversals.
- Funding differs across exchanges and payment timing rules vary. Check the contract specifications.