Funding Rates (2024)

FAQs

What does the funding rate tell you? ›

The funding rate reflects overall market sentiment. A high positive rate signals bullish sentiment, with traders willing to pay more to maintain long positions. On the other hand, a high negative rate indicates bearish sentiment, showing a preference for short selling.

The predicted funding rate is the current estimate of what the funding rate will be at the end of the current funding interval. Some exchanges refer to this as the real-time funding rate or the next funding rate.

High funding rates can make holding short and long positions expensive over time. It can also influence the market dynamics and the trading strategies. Therefore, understanding the funding rates help traders to make informed decisions.

The funding rate is updated every hour, but is represented as an 8-hour rate, indicating the amount of funding accounts may expect to pay/receive over an 8-hour period. The funding rate is composed of an interest rate component and the premium component.

When the market is bullish, the Funding Rate is positive and tends to rise over time. The long position traders will pay a Funding Rate to short position traders.

In perpetual futures contracts, a high funding rate for Bitcoin refers to a rate that exceeds the baseline rate of 0.01%. Generally, the maximum upper limit for Bitcoin funding rates is 0.375%, while the minimum lower limit is -0.375%, although there may be some variations between different exchanges.

In the long-term, the United States Fed Funds Interest Rate is projected to trend around 3.50 percent in 2025 and 3.25 percent in 2026, according to our econometric models.

Funding rates (or 'swap rates' for FX products) vary depending on the instrument and may change on a daily basis. These are quoted as an annual rate. Each instrument has two quoted rates: one for a buy/long position and the other for a sell/short position.

Open Interest = the sum total of all open positions for an individual perpetuals market. The positive or negative value assigned to a funding rate determines the interest rate payments between longs and shorts within a given funding interval – expressed as a percentage of an open position's size.

By carefully timing your trades in relation to funding intervals, you can either avoid or take advantage of funding rate payments. Positioning around funding intervals can help optimize your funding rate costs. Funding rates can also create arbitrage opportunities since funding rates can vary among exchanges.

How to profit from funding rates? ›

The goal is to earn funding fee income from perpetual contract trading. When the funding rate is positive, buying spot and shorting an equivalent position in perpetual contracts generates stable funding fee income. This type of arbitrage is also known as positive arbitrage.

Funding is calculated algorithmically based on the Index Price and sampled Mid-Market Prices for the perpetual. When the rate is positive (perpetual trades at a premium relative to index), traders who are long will make payments to traders who are short.

The funding rate ensures that the funding mechanism aligns the futures market price with the index price. When the funding rate is positive, users who have long positions pay a funding fee to users who have short positions.

For example, if a trader has a long position worth $10,000 and the funding rate is +0.01%, they would pay $1 to the short position holders. Similarly, if a trader has a short position worth $10,000 and the funding rate is -0.01%, they would receive $1 from the long position holders.

Hence, if (I − P) is within +/−0.05%, then F = P + (I − P) = I. In other words, the funding rate will equal the Interest Rate. This calculated funding rate is then applied to a trader's position value to determine the funding fee to be paid or received at the funding timestamp.

The federal funds rate is one of the Federal Reserve's key tools for guiding U.S. monetary policy. It impacts everything from the annual percentage yields you earn on savings accounts to the rate you pay on credit card balances, which means the fed funds rate effectively dictates the cost of money in the U.S. economy.

A negative funding rate means that short positions in perpetual futures contracts must pay funding to long positions. This typically occurs when the price of the perpetual futures contract is lower than the price of the underlying asset, causing short position holders to pay funding fees to maintain their positions.

The funding rate, calculated on an hourly basis, is the relative excess of Mark Price over the Index Price. The main purpose of funding rate is to align the prices of perpetual futures contracts with the Underlying Market and incentivize market equilibrium.

The term federal funds rate refers to the target interest rate range set by the Federal Open Market Committee (FOMC). This target is the rate at which commercial banks borrow and lend their excess reserves to each other overnight. The FOMC is the policymaking body of the Federal Reserve System.