What is the Funding Rate in Crypto Trading?
In the world of cryptocurrency derivatives, specifically Perpetual Futures Contracts (Perps), there is no expiry date. Unlike traditional futures where contracts settle on a specific date, perpetual contracts can be held indefinitely. To ensure the price of the perpetual contract stays close to the spot price of the underlying asset (e.g., Bitcoin or Ethereum), exchanges utilize a mechanism called the Funding Rate.
The Funding Rate is a periodic payment made between traders holding Long positions and traders holding Short positions. It is not a fee charged by the exchange; it is a peer-to-peer exchange of value designed to achieve price convergence.
How Funding Rates Work
- Positive Funding Rate (> 0%): The perpetual price is trading above the spot price. To bring the price down, Longs pay Shorts.
- Negative Funding Rate (< 0%): The perpetual price is trading below the spot price. To push the price up, Shorts pay Longs.
The Funding Fee Formula
The actual amount you pay or receive is calculated based on your Notional Position Value, not just your margin collateral.
Funding Fee = Position Value × Funding Rate
Where Position Value = Mark Price × Quantity of Asset.
Why Calculate Funding Fees?
For high-frequency traders or those using high leverage, funding fees can significantly impact profitability. A seemingly small rate of 0.01% every 8 hours equates to 10.95% APR. During periods of extreme volatility, funding rates can spike, causing the cost of holding a position to become prohibitively expensive (or highly lucrative if you are on the receiving side).
Annualized Funding Rate (APR)
This calculator also projects the Annualized Percentage Rate (APR) of the funding. This assumes the current rate remains constant over a year, which is rare, but it serves as a useful metric for comparing the cost of carrying a trade versus other lending or borrowing opportunities.