The funding rate is a recurring payment between traders who are long and traders who are short in a perpetual futures market. When the contract trades above its reference price (usually an index of the underlying asset’s price), longs pay shorts. When it trades below, shorts pay longs.
It’s what keeps a contract with no expiry date close to the price of the asset it tracks. For you, it’s also an ongoing cost of holding a position, or an ongoing payment if you’re on the receiving side.
Why do perpetual futures have funding rates?
A traditional futures contract’s price has to meet the asset’s price at expiry, because that’s when it settles. As the date gets closer, any gap between the two closes. A perpetual future never expires, which is the appeal: you can hold a leveraged position without rolling it into a new contract. But without an expiry date, nothing forces the price back in line.
Funding does that job. When the perp trades above its reference price, longs pay shorts, which makes staying long more expensive and going short more attractive. When it trades below, the payment flips. Either way, the incentive nudges the price back toward the reference price.
How is the funding rate calculated?
Formulas vary by platform and by market. Most start with a premium component, which measures how far the perp has traded from its reference price over the funding period. That’s the main signal of whether traders are crowding one side. Some platforms add an interest-rate component, a small baseline that reflects the cost of holding the underlying asset over time. Most also cap how far the rate can move in a single period, so it can’t spike to extremes when the premium jumps.
Two things are often misunderstood:
Funding goes between traders, not to the platform. It isn’t a commission or a trading fee.
Timing matters. On most platforms, you only pay or receive funding if you hold a position at the funding time, so a position opened and closed in between pays nothing. Some platforms charge continuously instead, so check how yours works.
What funding costs over time
A per-period rate looks tiny, but it’s charged every period you hold. To see the real cost, multiply the rate by the number of funding periods in a day, then by 365. Here’s what that looks like at a few rates, assuming funding every 8 hours (3 times a day) and a rate that stays the same all year:
Rate per 8 hours | Per day | Per year |
|---|---|---|
| 0.01% | 0.03% | About 11% |
| 0.03% | 0.09% | About 33% |
| 0.05% | 0.15% | About 55% |
Rates rarely stay flat for a full year, so treat this as a way to size the cost, not a forecast.
Say you hold a $10,000 USD long position at 0.01% every 8 hours. That’s $1 per period, $3 a day, about $21 a week, and about $1,095 over a year. On anything longer than a few days, funding becomes a real part of the trade’s cost. And on a leveraged position, it comes straight out of your margin.
Funding intervals also vary. Some platforms charge every 8 hours, and others every 1, 2, or 4 hours. When you compare rates across platforms, check how often each one is charged and convert them to the same basis, like a daily rate.
What positive and negative funding rates signal
Because funding tracks the gap between the perp and its reference price, it also shows how traders are positioned. A high positive rate that lasts means a lot of traders are long and paying for it. A negative rate means the reverse: shorts are crowded and paying for longs.
That makes funding a read on sentiment, not a trading signal on its own. Very high funding over a long stretch can point to a crowded trade that’s vulnerable to a sharp reversal. But strong trends can also run with high funding for weeks. Traders usually look at it alongside price, open interest (the number of contracts still open), and liquidation data.
How traders manage funding costs
Timing trades around funding
On platforms that charge funding at set times, some short-term traders open and close positions around those times to avoid a payment. It won’t make much difference on a trade you plan to hold for weeks, but for short trades, it’s one more thing within your control.
Cash and carry
Cash and carry, sometimes called funding rate arbitrage, is the classic way to collect funding instead of paying it. You buy the asset itself and short the perp in the same amount. Price moves on the two positions largely cancel out (this is called being delta-neutral), so the funding you collect is the return. It only works when funding is positive, meaning shorts are being paid. Flip it around, with a long perp and a short position in the asset, and you’d be paying funding with no price exposure to show for it.
It’s harder than it sounds. Trading costs can eat into a thin return. The short perp still needs margin, and a sharp rally can liquidate it even though the other position gained. And if funding turns negative, your income becomes a cost.
What Canadian traders should know
How funding is taxed
How funding payments are taxed generally follows how the rest of your trading is treated. Frequent, active trading is usually treated as business income, which is fully taxable. Occasional trading may be treated as capital, where only part of a gain is taxable. The Canada Revenue Agency (CRA) decides based on the facts of each case, so check with a tax professional if you’re not sure which applies to you.
Currency and record-keeping
Funding on most perps is paid in U.S. dollars, so the Canadian-dollar cost of holding a position moves with the exchange rate for as long as it’s open. Every funding payment is also a separate record: 3 a day on an 8-hour schedule, for as long as you hold. Over months, that’s a lot of entries to track at tax time.
