Funding Rate Fundamentals
What Are Funding Rates?
Funding rates are periodic payments between long and short position holders in perpetual futures markets to keep the futures price tethered to the underlying asset's spot price.
- Payments occur every 8 hours on most exchanges
- Positive rates: Longs pay shorts
- Negative rates: Shorts pay longs
- Rates vary by exchange and market conditions
Why Do They Exist?
Funding rates prevent perpetual futures prices from diverging significantly from spot prices by incentivizing traders to take positions that bring prices back into alignment.
- Maintains price stability
- Reflects market sentiment
- Balances long and short positions
- Compensates for price risk
How Rates Are Calculated
Each exchange uses its own methodology, but generally considers the difference between perpetual futures price and the underlying spot price, along with market depth and volatility.
- Based on price divergence (basis)
- Market sentiment factor
- Exchange-specific formulas
- Updated in real-time
Types of Funding Rates
Positive Funding Rate
When perpetual futures trade at a premium to spot price
Who Pays: Long positions pay short positions
Strategy: Buy spot, Short futures
Example: 0.1% rate: Longs pay 0.1% to shorts every 8 hours
Negative Funding Rate
When perpetual futures trade at a discount to spot price
Who Pays: Short positions pay long positions
Strategy: Short spot, Long futures
Example: -0.1% rate: Shorts pay 0.1% to longs every 8 hours
Understanding APR Calculations
APR Formula
APR = Funding Rate × 3 payments/day × 365 daysAnnual Percentage Rate helps normalize funding rates for comparison
Supported Exchanges
OKX
KuCoin Futures
Currently Limited
Exchange Account Setup
OKX
Requirements
- Complete identity verification (KYC)
- Enable futures trading
- Transfer USDT to futures account
- Understand position sizing rules
Helpful Links
KuCoin Futures
Requirements
- Complete identity verification
- Activate futures trading
- Transfer funds to futures account
- Review margin requirements
Helpful Links
Important Risks to Consider
Funding Rate Volatility
Rates can change dramatically between funding periods, potentially turning positive rates negative.
Mitigation: Monitor rates closely and have clear exit strategies
Exchange Platform Risk
Exchange downtime, maintenance, or insolvency can trap your funds.
Mitigation: Use reputable exchanges and consider diversifying across multiple platforms
Liquidation Risk
Extreme market movements can liquidate your futures position before you can close it.
Mitigation: Use conservative position sizing and maintain adequate margin
Execution Risk
Delays in opening/closing positions or slippage can reduce profits or create losses.
Mitigation: Monitor market conditions and use appropriate order types
Quick Start Checklist
Account Setup
- ✓ Create accounts on OKX and KuCoin
- ✓ Complete identity verification
- ✓ Enable futures trading
- ✓ Transfer initial funds
Safety Precautions
- ✓ Start with small position sizes
- ✓ Use testnet if available
- ✓ Keep detailed trading records
- ✓ Monitor funding rate changes