If you’ve ever traded perpetual futures and thought:
“Why is money mysteriously leaving (or entering) my account every 8 hours?”
— you’ve already met the funding rate.
Most traders ignore it, treating it like some random platform fee. Big mistake. In fact, understanding funding rates is the first step toward arbitrage strategies that can generate steady, low-risk returns while everyone else is gambling on moonshots.
Let’s break it down in plain English.
What Exactly Is the Funding Rate?
Perpetual contracts (or “perps”) don’t expire like traditional futures. So exchanges created a mechanism — the funding rate — to keep contract prices close to the spot market.
Here’s how it works:
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If the perp is trading above spot, longs pay shorts (funding is positive).
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If the perp is trading below spot, shorts pay longs (funding is negative).
In short: funding rate = a little nudge that balances the system.
How Is the Funding Rate Calculated?
It’s not random — there’s a formula. While details vary by exchange, the basic structure looks like this:
Funding Rate = Premium Index + Interest Rate Adjustment
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Premium Index → Measures how far the perp price drifts from spot.
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If perps are higher than spot, premium is positive.
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If perps are lower, premium is negative.
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Interest Rate → A fixed adjustment factor, usually small, to account for the cost of holding longs vs. shorts.
Exchanges typically settle funding every 8 hours (Binance, Bybit, OKX, etc.).
Why Should You Care?
Because funding rates can eat into your profits — or become your paycheck.
Example:
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You’re long on a crypto perp with a +0.03% funding rate.
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Every 8 hours, you’re paying shorts 0.03% of your notional value.
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Over weeks, that’s a silent leak in your PnL.
But flip it around: if you’re short while funding is positive, you earn that fee. And that’s where funding rate arbitrage comes in.
Funding Rate Arbitrage Basics
The simplest idea is cash-and-carry arbitrage:
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Buy spot BTC.
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Short BTC perpetual futures.
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Now you’re market-neutral (no exposure to BTC price).
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But if funding is positive, you earn the funding fee on your short position — risk-free yield (ignoring platform risks).
It’s not sexy, but it’s powerful. While other traders sweat over every candle, arbitrageurs quietly collect funding fees like rent checks.
My “Wake-Up” Moment
I once held a long perp trade for two weeks. The position looked profitable… until I realized I had paid more in funding than I made from price movement. Ouch.
That’s when I stopped ignoring funding rates. Once I started tracking them and experimenting with neutral arbitrage positions, I discovered something: steady, boring profits beat exciting, emotional losses every time.
Key Takeaways
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The funding rate is the heartbeat of perpetual futures. Ignore it at your own risk.
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Positive funding = longs pay shorts. Negative funding = shorts pay longs.
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Arbitrage traders use spot + perp shorts to earn funding without price risk.
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Always factor funding into your trading decisions — it can flip a “profitable” trade into a loss.
If you want to stop being drained by hidden fees, start paying attention to funding rates. Better yet, make them work for you.
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