If you trade perpetual futures, you'll encounter funding fees. They're a recurring cost (or income) that can quietly eat into your profits or boost them, depending on which side of the trade you're on.
What Are Funding Fees?#
Funding is a mechanism that keeps perpetual futures prices in line with the spot market. Since perps don't expire like traditional futures, there's no natural settlement to anchor the price. Funding does that job instead.
Every few hours (usually every 8 hours, sometimes every hour on some exchanges), one side of the market pays the other:
- Positive funding: Longs pay shorts.
- Negative funding: Shorts pay longs.
The rate varies based on market conditions and is expressed as a percentage of your position size.
Why Funding Exists#
If everyone is bullish and going long, the perp price can drift above the spot price. To correct this, funding goes positive, meaning longs have to pay shorts. This incentivizes people to short (or close longs), bringing the perp price back down.
The opposite happens when everyone is bearish. Perp trades below spot, funding goes negative, shorts pay longs, and the price corrects upward.
It's a self balancing mechanism built into the market.
How Funding Is Calculated#
The exact formula varies by exchange, but it generally depends on the difference between the perp price and the spot price (premium or discount), an interest rate component, and market demand for longs vs shorts.
You don't need to calculate it yourself. Exchanges show the current funding rate and when the next payment happens.
How Funding Affects Your Trades#
If you're holding a position through a funding period:
Positive funding and you're long means you pay. Positive funding and you're short means you get paid. Negative funding and you're long means you get paid. Negative funding and you're short means you pay.
The payment is automatic. It comes out of (or goes into) your margin.
Example: You have a $10,000 long position. Funding rate is 0.01% (positive). At funding time, you pay $1.
Doesn't sound like much, right? But funding happens 3 times a day. That's $3 per day, $90 per month, $1,080 per year, just in funding on a single position. If funding spikes to 0.1% during a bull run, that's $10 every 8 hours, $30 per day, $900 per month.
It adds up.
When Funding Matters Most#
Holding positions for days or weeks: Swing traders and position traders need to factor in funding. Over time, it becomes a significant cost (or benefit).
During extreme market conditions: When the market is euphoric or panicking, funding rates can spike to 0.1%, 0.3%, or even higher. Holding against the crowd becomes expensive.
Scalping and day trading: If you're in and out within minutes or hours, funding barely matters. You're rarely holding through a funding period.
Trading Around Funding#
Some traders specifically trade around funding. They open a position right after funding is paid, close before the next one. They short during high positive funding to collect payments. They avoid holding longs during extreme positive funding environments.
This isn't a strategy for beginners, but understanding it helps you avoid unnecessary costs.
Funding and Copy Trading#
If you're copy trading, you inherit the funding exposure of the trader you're copying. If they hold a long position through multiple funding periods in a high funding environment, so do you.
Check the funding rates on the assets you're exposed to. A trader might be profitable before funding, but if they're paying 0.1% three times a day, the net result could look different for copiers who stay in the position.
Funding is one of those things that doesn't feel important until you realize it's been draining your account for weeks. If you're trading perps and holding overnight or longer, know the rate, know which side you're on, and factor it into your expected returns. It's not optional, it's part of the cost of the trade.
