If you want to profit from perpetual futures, there is a concept you absolutely must understand. That is the funding rate.

What is the funding rate? In simple terms, it’s like a fee exchanged periodically between traders holding long and short positions in the perpetual futures market. This mechanism helps prevent the futures price from diverging significantly from the spot price.

When the rate is positive, the long holders pay the short holders. When it’s negative, the opposite is true. In other words, the flow of fees changes depending on market sentiment.

The funding rate is determined by two factors. One is the interest rate, which reflects the borrowing costs difference between the base currency and the quote currency. The other is the premium index, which measures the deviation between the futures price and the spot price.

If the premium is positive, it indicates strong buying interest, with futures trading higher than the spot price. If negative, it signals strong selling interest.

However, the calculation method for the funding rate varies by exchange. For example, one major exchange uses a fixed interest rate model, with a default rate of 0.03% per day. This is paid in three installments every 8 hours.

The funding rate is not just a fee; it’s a crucial mechanism to maintain market balance. If you’re trading, understanding this system and applying it to your position management is important. I recommend checking how your exchange calculates the funding rate.