what is a funding fee

What Is Funding Rate (FundingRate)?

The funding rate is the cost of holding a position in perpetual contracts.

It represents the periodic payments exchanged between long and short positions in perpetual futures, designed to keep contract prices aligned with spot market prices. When the contract price exceeds the spot price, the funding rate is positive—longs pay shorts. When the contract price is below the spot price, the funding rate is negative—shorts pay longs.

Funding rates are settled at fixed intervals, commonly every 8 hours on major exchanges. While the calculation details and limits may vary across trading pairs and platforms, the underlying principle remains consistent: the more crowded side pays the funding fee.

Why Is Understanding Funding Rate Important?

Funding rates directly impact your actual holding costs and returns.

If you maintain a position during a positive funding rate phase, ongoing payments can erode your profits; conversely, during negative funding periods, your position may receive regular subsidies. For short-term traders or those using market-neutral strategies, funding rate arbitrage can be a significant source of profit.

Funding rates also serve as a market sentiment indicator. A positive rate generally signals an overcrowded long side and bullish sentiment; a negative rate indicates an overcrowded short side and a more cautious market. Understanding funding rates can help you gauge market momentum and potential risks.

On exchanges like Gate, contract details pages display both current and projected funding rates, along with the countdown to the next settlement, enabling you to assess your entry cost and potential returns with greater accuracy.

How Does Funding Rate Work?

Funding rates are determined by the difference between contract prices and spot prices.

Perpetual contracts have no expiry date. Exchanges use funding rates to keep contract prices close to spot prices. The system references both the “mark price” (used for PnL calculations) and the “index price” (an aggregate of spot prices from multiple exchanges). When contracts trade at a premium to spot, funding rates turn positive; if at a discount, rates turn negative.

Settlements occur on a fixed schedule, typically every 8 hours. At each interval, payments are calculated based on the current funding rate and position size. If you are long during a positive rate, you pay; if you are short during a negative rate, you pay. Projected funding rates fluctuate with market conditions but only become effective at settlement.

Example: If the BTC perpetual projected funding rate is +0.01% per 8 hours and you hold a long position worth 1 BTC, you pay 0.01% of the notional value to shorts at settlement. If the rate is -0.01%, shorts pay longs.

Where Are Funding Rates Most Commonly Seen in Crypto?

Funding rates are most prevalent in perpetual contracts, spot-futures arbitrage, and neutral strategies.

On exchanges like Gate’s USDT perpetuals, funding is settled every 8 hours, with both current and projected rates and a settlement countdown displayed on trading pages. Short-term traders often adjust positions ahead of settlement to avoid periods with high funding fees.

Spot-futures arbitrage: When funding rates remain positive over time, traders commonly buy spot and sell an equivalent perpetual short position to capture both funding payments and price basis spreads. If rates turn negative, the reverse approach may be preferable. This strategy focuses on structural returns rather than directional bets.

In neutral grid or quantitative strategies, funding rate is a key parameter. These strategies shift position structures between positive and negative rate periods—aiming to hold positions during subsidy periods and reduce leverage or close out during high-cost phases.

How Can You Reduce Funding Rate Costs?

Step 1: Check funding rates and settlement times.

On Gate’s contract trading page, locate the “funding rate” and “projected funding rate” for your pair and confirm the next settlement time. Opening positions outside high-fee periods can immediately lower your costs.

Step 2: Choose direction or side strategically.

During positive funding periods, favor shorts or reduce long exposure; during negative periods, favor longs or reduce shorts. You don’t need to always trade against the crowd—just minimize your exposure to costly positions.

Step 3: Use spot-futures hedging.

When rates are persistently positive, consider combining spot longs with perpetual shorts; when rates are negative, consider spot shorts (or no spot holdings) with perpetual longs. Hedging can minimize directional risk while converting funding costs into potential income.

Step 4: Switch trading pairs or contract types.

Different pairs have varying funding rates and levels of crowding. Major coins tend to have steadier rates; low-cap coins often see extreme funding swings. You can also choose between USD-margined and coin-margined contracts based on current rates and liquidity.

Step 5: Manage leverage and holding duration.

High leverage amplifies funding payments for a given notional value. Shorten your holding period or reduce leverage to compress recurring funding costs significantly.

Step 6: Monitor projected funding rate changes.

Projected rates can change rapidly before settlement. Adjust your position structure or use limit orders to control execution costs as needed before settlement time.

What Are Recent Funding Rate Trends or Noteworthy Data?

Over the past year, major trading pairs have seen funding rates trend toward equilibrium.

Looking at 2025 as a reference period, monitoring platforms and multiple exchange pages show that BTC and ETH perpetuals typically fluctuate around zero every 8 hours, with monthly averages mostly between -0.01% and +0.01%. On highly volatile days, single-period peaks may reach +0.03% to +0.05% (based on Q3-Q4 2025 data).

In the second half of 2025, altcoins exhibited much more extreme distributions. Trending tokens frequently saw 8-hour funding rates exceeding +0.10% during rallies—annualized returns were substantial for brief periods; in downturns, negative rates were equally pronounced, with settlements of -0.05% to -0.10% not uncommon. This is driven by sector rotation and concentrated leveraged positions—amplifying the “crowded side pays” mechanism.

Compared to all of 2024, higher open interest and participation in derivatives during 2025 led to more frequent switches between positive and negative rates for majors, though average rates for top coins remained stable overall. This means directional traders face manageable long-term cost pressures, while short-term opportunities and risks for trending tokens have become more pronounced.

How Is Funding Rate Different from Interest Rate?

Funding rate is not a lending interest rate.

Interest rates relate to borrowing or lending assets—representing traditional “time value of money.” Funding rate in perpetual contracts is an “crowding cost,” designed to anchor contract prices to spot through imbalances in long/short positions—frequently flipping between positive and negative values within short intervals.

Interest rates are usually charged daily or annually with a fixed direction; funding rates are settled periodically with direction determined by market imbalances. Confusing these can lead to underestimating real contract holding costs or misjudging strategy returns.

Related Terms

• Funding Rate: The periodic fee exchanged between long and short sides in perpetual contracts to keep contract prices aligned with spot.
• Perpetual Contract: A derivative contract with no expiration date; traders can use leverage to go long or short.
• Leverage Trading: Using borrowed funds to amplify gains or losses—high risk trading.
• Mark Price: Reference price used by exchanges to prevent manipulation by keeping contract prices close to spot.
• Liquidation: Automatic closing of positions by the exchange when account equity is insufficient, protecting platform risk.

FAQ

What Does It Mean When Funding Rate Is Positive?

A positive funding rate indicates bullish sentiment—long positions must pay shorts. When the rate is high, it shows an excess of longs and optimistic market mood. Shorts benefit from receiving funding payments; this scenario often signals increased risk of a price correction.

How Do You Arbitrage Funding Rate?

Funding rate arbitrage typically uses a “spot-perpetual hedge”: buying the asset on the spot market while shorting it via perpetual contracts to earn the funding rate spread. This requires strong risk management and substantial capital. Beginners should practice on demo accounts (like Gate’s) to understand how rates change before trading live—avoiding slippage and amplified risks.

What Should You Do When Funding Rate Is Negative?

A negative funding rate signals bearish sentiment—shorts pay longs, who receive extra income. If you believe in a token’s long-term prospects, consider opening long perpetual positions during negative-rate periods to earn subsidies while waiting for price recovery. Be sure to set stop-losses to guard against further declines.

Are Funding Rates the Same Across Exchanges?

Funding rates vary across exchanges due to differences in order book depth and user sentiment. Large platforms like Gate or Binance have deep liquidity, resulting in smoother rate fluctuations; smaller exchanges may see extreme rates. Discrepancies between Gate and other platforms present arbitrage opportunities—but consider cross-exchange risks and additional fees.

How Often Are Funding Rates Calculated?

Most exchanges (including Gate) settle funding rates every 8 hours—at midnight, 8 AM, and 4 PM Beijing Time. Within each cycle, rates adjust dynamically based on mark price versus index price deviations over the last hour. Knowing settlement times helps you plan entries/exits strategically and avoid high-fee periods when holding positions passively.