If you trade perpetual contracts, you’ve definitely seen the funding rate. This is, in fact, a mechanism designed to keep the overall balance of the market.

Put simply, the funding rate is the fee that’s exchanged periodically between long and short traders. When the price of a perpetual contract deviates from the spot price, it triggers to close that gap. If it’s positive, the long side pays the fee; if it’s negative, the short side pays. The idea is to bring the price back to its proper level.

There are two major factors that determine the funding rate. One is the interest rate, which reflects the difference in borrowing costs between currency pairs such as dollars and Bitcoin. The other is the premium index, which measures the divergence between the perpetual contract price and the spot price. If the premium is positive, it means perpetual contracts are being bought at a higher price. Conversely, if it’s negative, they’re being sold off.

Actually, even though it’s called the funding rate, the calculation method varies quite a bit from exchange to exchange. For example, some large exchanges adopt a fixed interest rate model and, by default, set an interest rate of about 0.03% per day. This interest is paid in three installments every eight hours. So when you look at the trading screen, you’ll see the current funding rate and a countdown to the next payment.

When you trade, understanding how the funding rate works makes position management much easier. Especially when holding long positions for the long term, you should always check whether the funding rate is turning positive. If it’s negative, then you’re actually getting paid fees just for holding the position—so it can be pretty advantageous. I recommend that you take the time to fully understand how the funding rate works on the exchange you use.