CoinTN
Anyone who has traded perpetual futures has probably noticed the "funding rate"—every few hours, a sum of money is either added to or deducted from your account. Many beginners don't understand what this is, or even realize they are implicitly being charged. You can view the real-time funding rate on the futures trading page of the official Binance website. You can also monitor it anytime by opening the official Binance App. Apple users should first refer to the iOS installation guide to install the App.
What exactly is the Funding Rate
Unlike traditional futures contracts, perpetual futures have no expiration date. This means there is no natural settlement mechanism to force the contract price to converge with the spot price. If left unchecked, the price of a perpetual contract could deviate further and further from the spot price.
The funding rate is a mechanism designed to solve this problem. It maintains the peg between the perpetual contract price and the spot price by requiring long and short positions to pay fees to each other.
Simply put: When the perpetual contract price is higher than the spot price, it indicates that the market's bullish sentiment is overheated. At this time, the funding rate is positive, and longs need to pay shorts. The effect of doing this is to increase the cost of going long and encourage people to go short, thereby bringing the contract price back down toward the spot price.
Conversely, when the perpetual contract price is lower than the spot price, the funding rate is negative, and shorts need to pay longs, encouraging people to go long and pulling the contract price back up.
Funding Rate Settlement Time
On Binance, the funding rate is settled once every 8 hours, at 00:00, 08:00, and 16:00 UTC time (which corresponds to 08:00, 16:00, and 00:00 Beijing time).
Only those who hold a position at the exact moment of settlement need to pay or receive the funding fee. If you close your position a few seconds before the settlement, you do not need to pay this fee.
How is the Funding Rate Calculated
The formula for calculating the funding rate is relatively complex, involving interest rates and a premium index. But as an ordinary trader, you don't need to calculate it manually; Binance will display the current and predicted funding rates in real-time.
What you need to care about is the actual amount paid or received, and the calculation method is very simple:
Funding Fee = Position Value × Funding Rate
For example, if you hold a BTC long position worth 10,000 USDT and the current funding rate is 0.01%. Then at the settlement time, you need to pay 10,000 × 0.01% = 1 USDT to the short side.
If the funding rate is -0.01%, then as a long, you will instead receive 1 USDT.
Normal Range of Funding Rate
Under normal circumstances, the funding rate for the Binance BTC perpetual contract fluctuates between -0.01% and 0.03%. 0.01% is the most common normal value.
When the funding rate exceeds 0.05% or even reaches above 0.1%, it indicates that the market's bullish sentiment is extremely overheated, which is often a signal that the market is peaking. When the funding rate is continuously negative, it indicates that the bearish sentiment is too heavy, which may be a signal of an imminent market rebound.
How to Check the Funding Rate on Binance
Method 1: Futures Trading Page
On the Binance futures trading page, the current funding rate and the countdown to the next settlement are displayed below the trading pair name. Clicking on it allows you to view more detailed information, including historical funding rates.
Method 2: Funding Rate History Page
Find the "Futures Data" section on the Binance official website and select "Funding Rate History" to view historical funding rate data for all trading pairs. You can filter by trading pair to view the trend of funding rate changes over the past few days, weeks, or even months.
Method 3: Funding Rate Ranking
Binance also provides a funding rate ranking page, displaying the trading pairs with the highest and lowest current funding rates. This is very useful for finding arbitrage opportunities.
Impact of Funding Rate on Trading
Short-term Traders
If you are a short-term trader and hold a position for less than a few hours, the funding rate has very little impact on you. A funding rate of 0.01% is only 1 USDT for a 10,000 USDT position. However, if the funding rate is abnormally high (e.g., 0.1%), a single settlement is 10 USDT, which is not a small amount for short-term traders with small positions.
Recommendation: When the funding rate is abnormally high, if you happen to have a position, you can consider closing it before settlement and reopening it afterward to avoid paying high funding fees.
Long-term Holders
The funding rate has a significant impact on long-term holders. With three settlements a day, the daily cumulative fee = Position Value × Funding Rate × 3. Assuming an average funding rate of 0.01%, the daily cost is 0.03%, which translates to 0.9% per month and nearly 11% per year.
This means that if you hold a long position long-term and the funding rate remains positive, this cost is quite substantial. Therefore, holding a long position for the long term does not necessarily require using perpetual futures; you can consider holding spot or using delivery contracts.
Short Sellers
Most of the time, the funding rate in the crypto market is positive, which means short sellers receive funding fees. If you have a short position, you will receive money at every settlement. This is an additional income for short sellers.
However, be aware that a positive funding rate usually means strong bullish sentiment in the market, and going short itself may face the risk of loss. Do not go short against the trend just to collect the funding rate.
Funding Rate Arbitrage Strategies
Funding rate arbitrage is a relatively low-risk way to make money. The basic idea is to simultaneously hold positions in opposite directions to hedge against price risks while earning the funding rate.
Spot Hedging Arbitrage
When the perpetual futures funding rate of a certain coin remains high, you can buy the coin in the spot market while simultaneously opening a short position of the same value in the futures market.
In this way, when the price rises, the spot makes money and the futures lose money; when the price falls, the spot loses money and the futures make money. The impact of price changes on you is basically hedged out. However, as the short side, you can collect funding fees at every settlement.
Example: The BTC funding rate is 0.03% (a relatively high level). You buy 1 BTC in spot (about 60,000 USDT) and simultaneously short 1 BTC in the perpetual contract. Every 8 hours, you collect a funding fee of 60,000 × 0.03% = 18 USDT. Three times a day is 54 USDT. If the funding rate can be maintained at this level, the monthly return is about 1,620 USDT.
Of course, in actual operation, you must consider opening fees, the price spread between spot and futures, and the risk of the funding rate dropping.
Cross-Exchange Arbitrage
If there is a significant difference in the funding rate of the same coin across different exchanges, you can also go short on the exchange with the high rate and go long on the exchange with the low rate to earn the rate difference.
This strategy requires opening accounts on multiple exchanges and maintaining funds, which is more complicated to operate and is suitable for experienced traders.
Funding Rate as a Trading Signal
The funding rate is not only a cost but can also serve as an indicator of market sentiment.
An extremely high positive funding rate (for example, exceeding 0.05%) usually means the market is overly optimistic and the long side is overcrowded. In this situation, the market may experience a pullback.
A continuous negative funding rate means market panic, and bears have the upper hand. In this situation, a short-covering rebound may occur.
When the funding rate returns to normal from extreme values, it is usually accompanied by a reverse movement in price. You can pay attention to these turning points to assist in judging the market trend.
However, note that the funding rate is just one of many market indicators and should not be relied upon solely for making trading decisions. It needs to be combined with price trends, trading volume, and other technical indicators for comprehensive judgment.
Important Notes on Funding Rate
First, do not ignore the impact of the funding rate on long-term holding costs. Many people only calculate the trading fees and forget the hidden cost of the funding rate.
Second, trade cautiously when the funding rate is extremely abnormal. Extreme funding rates often mean that the market is about to experience significant fluctuations, and entering rashly carries high risks.
Third, pay attention to liquidity risks when doing funding rate arbitrage. Under extreme market conditions, spot and futures prices may temporarily decouple, and arbitrage positions may face temporary floating losses.
Fourth, pay attention to the funding rate differences among different coins. The funding rate for popular coins is usually relatively stable, while the funding rate for smaller coins can fluctuate greatly.
Frequently Asked Questions
Does Binance charge the funding rate?
No. The funding rate is a fee paid between longs and shorts, and Binance does not collect any fees from it. Binance simply provides this mechanism to maintain the balance between the contract price and the spot price.
Will I be charged the funding rate when I don't hold a position?
No. Only those who hold a position at the exact moment of settlement need to pay or receive the funding fee. If you close your position before the settlement, you will not be affected.
How often does the funding rate change?
Binance's funding rate is updated every 8 hours, and the funding rate for the next period will be recalculated after each settlement. You can see the "Predicted Funding Rate" on the futures trading page to get an idea of what the next period's rate will be.
What does a negative funding rate mean?
A negative funding rate means shorts need to pay longs. This usually happens when the market is falling or when bearish sentiment is too heavy. If you hold a long position, you will receive money when the funding rate is negative.
How to avoid paying high funding rates?
Avoid holding positions through the settlement time point when the funding rate is high. If you must hold a position, you can choose trading pairs with lower funding rates. For long-term longs, you can consider using spot instead of perpetual futures to reduce funding rate costs.