I just realized that many people still do not fully understand what funding is, especially those who are new to the futures trading world. Today, I will share some things I have learned about it.

To recap, what is funding? It is a type of fee or interest paid periodically between long buyers and short sellers in the futures market. Its main purpose is to keep the futures contract price from diverging too much from the actual market price. You will see it calculated based on the difference between spot and futures prices, usually expressed as a percentage.

The mechanism of the funding rate is quite interesting. When the funding rate is positive, it means the futures price is higher than the spot price, so long buyers must pay short sellers. Conversely, when it is negative, the futures price is lower than the spot price, so short sellers pay long buyers. This truly reflects market sentiment, especially during bull markets when everyone is optimistic.

I find that the funding rate plays a significant role in maintaining market stability. It helps balance between buyers and sellers, preventing one side from gaining too much dominance. Additionally, it limits easy profit-making by exploiting the price difference between spot and futures. Without this mechanism, the market could become volatile and unstable.

In terms of calculation, what is funding in the formula? It includes the Premium Index (based on the difference between futures and market prices), Mark Price (the current contract price), Fair Price (the ideal future price), and Funding Interval (the calculation period, usually 8 hours). The basic formula is to multiply the total open position volume by the funding rate.

Now, let’s talk about how to make money from it. Some experienced traders often look for assets with high positive funding rates, then buy spot and open a short position with an equal volume. For example, if you buy $20,000 worth of BTC and simultaneously open a $20,000 short, with a funding rate of 0.01%, you will earn about $6 per day, equivalent to $2,190 annually or approximately 10.95% APR. However, this strategy only works when the funding rate is positive, and you need to monitor it constantly because it changes frequently.

But it must also be acknowledged that funding rates are not always beneficial. They can pose financial risks if you do not understand them well. Some people may even intentionally create large orders to manipulate the Premium Index and increase the funding rate for profit, which undermines fairness. Transaction costs can also increase significantly if the funding rate fluctuates sharply.

If you want to earn money from funding rates, I have some advice. First, understand clearly how it works on the exchange you use, because each platform has different calculation methods. Second, risk management is crucial—don’t put all your money into one trade. Third, limit leverage use; it’s like a double-edged sword. Finally, always monitor the market because funding rates change constantly, and you need to keep up with those changes.

There are also some related terms you should know, such as Long (buyers expecting prices to rise), Short (sellers expecting prices to fall), Liquidation (closing positions), Perpetual Swap (perpetual contracts), or Auto-Deleveraging. These concepts will help you understand the futures market more deeply.

In summary, what is funding? Essentially, it is a mechanism to protect the market and also an opportunity to make money if you know how to use it. But remember, nothing is risk-free in trading, so learn more, practice carefully, and always have a solid risk management plan.