In the perpetual futures market, at regular intervals, one of the long or short traders is required to make payments to the other, the amount of which depends on the funding rate.
The capital charge rate prevents persistent price divergence between the two markets, and therefore most exchanges willCalculated every eight hours。
The calculation of the funding rate consists of two components: the Interest rate and the Premium.
interest rates
Different exchanges have different methods of calculating interest rates. Take Bitget and OKX for example, Bitget doesn't have a fixed interest rate and OKX's interest rate is set to 0.03% per day by default.
premiums
During periods of high volatility, there may be price divergence between the perpetual contract and the spot. In this case, the premium will increase or decrease accordingly.
Premiums vary depending on the difference between the prices in the contract and spot markets, with high spreads resulting in high premiums and conversely lower premiums reflecting a smaller spread between the prices in the two markets.
Positive and negative funding rates
When the margin rate is positive, it means that the price of the perpetual contract is higher than the spot price, so that long traders have to pay for their short positions.
On the contrary, a negative margin rate means that the price of a perpetual contract is lower than the spot price, which means that a short trader has to pay for a long position.
How do funding rates affect traders?
Since the funding rate calculation includes leverage, if high leverage is used, even in a low volatility market, traders who pay for funding may suffer losses and have their positions forced closed (blown out).
You can find the funding rates in the exchange's Sustainable Contracts trading interface, using Bitget and OKX as examples:
How to Trade with Capital Rates
Traders can use the funding rate of a perpetual contract to determine the direction of the market.
Positive funding rates indicate that the market is becoming more optimistic as long traders need to pay money to short traders.
On the contrary, negative margins indicate that the market consensus is bearish and that short traders are paying money to long traders.
Generally speaking, the persistence of high funding rates reflects the onset of FOMO by market participants, which is a relatively rare occurrence in bear markets, so when this occurs, a sharp market price correction is very likely to occur at any time.
Traders can take profits or avoid taking long positions when the margins are higher, as the signal is informative in identifying tops.
On the contrary, when the funding of a perpetual contract goes to zero or negative, it can be seen as an opportunity to open a long position.