Funding Rates Explained: How They Eat Your Profits
If you have held a futures position overnight and noticed balance shrink, you have felt funding rates. This hidden cost can stack up or become a profit source if managed well.
What Are Funding Rates?
Funding rates are periodic payments exchanged between long and short traders in perpetual futures. They keep the perp price aligned with spot.
Simple Explanation
When longs are crowded, perp trades above spot and longs pay shorts. When shorts are crowded, shorts pay longs. This pushes price back to spot.
How Funding Rates Work
Funding has two components:
- Interest Rate: Usually 0.01% per 8 hours (0.03% daily)
- Premium/Discount: Difference between perp and spot price
Formula
Funding Rate = Interest Rate + Premium Index
Your Payment:
Funding Fee = Position Size * Funding Rate
Real Example
You hold a $50,000 BTC long
Funding rate is 0.03% (bullish market)
You are long, so you pay:
$50,000 * 0.0003 = $15 per 8 hours
That is $45/day or $1,350/month.
The Hidden Cost Problem
During strong trends, funding can reach extremes:
- Normal: 0.01% (0.03% daily = ~11% annually)
- Elevated: 0.05% (0.15% daily = ~55% annually)
- Extreme: 0.10%+ (0.30% daily = ~110% annually)
Warning: The Funding Trap
In 2021, some traders lost 20-30% to funding alone while waiting for a higher move. The market went up, but PnL went down.
Strategies to Minimize Funding Impact
Use spot for long-term holds
No funding on spot. For long-term bullish positions, spot is cleaner.
Close before funding time
Funding is charged at 00:00, 08:00, 16:00 UTC. Closing before reduces cost.
Collect funding (counter-trade)
When funding is extreme, some traders position to receive funding.
Compare exchange rates
Funding varies by exchange. Use tools like Coinglass to find lower rates.
Funding as a Trading Signal
Extreme funding can signal tops or bottoms:
- Very high positive funding: crowded longs -> potential top
- Very negative funding: crowded shorts -> potential bottom
- Rapid spikes: can precede volatility
Calculate Your True Trading Costs
Use our calculator to include fees and funding estimates:
Open Calculator