Perpetual swap contracts are a cornerstone of the cryptocurrency derivatives market. A key mechanism that ensures their price closely tracks the underlying spot market is the funding fee. This system facilitates periodic cash flow exchanges between long and short position holders, effectively anchoring the perpetual contract's price to its index price.
This guide breaks down everything you need to know about funding fees: how they work, how they are calculated, and their impact on your trading strategy.
How Do Funding Fees Work?
The core function of a funding fee is to balance the market. When the perpetual contract price trades above the spot index price, longs pay shorts. Conversely, when the contract price is below the index, shorts pay longs.
- Positive Funding Rate: Long position holders pay a fee to short position holders.
- Negative Funding Rate: Short position holders pay a fee to long position holders.
It is crucial to understand that this is a peer-to-peer transfer; the exchange merely facilitates the transfer and does not collect this fee as a service charge.
Funding Fee Schedule
Funding fees are typically exchanged at regular, predetermined intervals. The most common schedule is every eight hours, which often corresponds to 00:00, 08:00, and 16:00 UTC+8. However, some specific contracts may have schedules that occur every 1, 2, or 4 hours.
These fees are calculated and processed with millisecond precision without interrupting trading activity. Only traders holding open positions at the exact moment of the funding fee snapshot are obligated to pay or receive funds. If you close your position before the snapshot is taken, you will not participate in that funding cycle.
Important Notes:
- The exact timing of funding intervals is subject to change based on market conditions.
- If a perpetual contract is delisted just before a scheduled funding event, that cycle's fees are canceled.
- The snapshot process itself can take up to a minute to complete. For example, if you open a position at 00:00:20 (UTC+8) and the snapshot is still ongoing, your new position may still be included in that funding cycle.
How is the Funding Rate Calculated?
The funding rate is not arbitrary; it is derived from a precise formula designed to reflect market conditions. There are two primary calculation methods: the original and the updated logic.
Original Funding Rate Calculation
The original formula is:
Funding Rate = Clamp [MA(Premium Index – Interest Rate), Funding Rate Cap, Funding Rate Floor]
Where:
- Interest Rate: Was historically set to 0.
- Clamp: A function that restricts the result between a maximum (cap) and minimum (floor) value.
- Premium Index: = [(Contract Best Bid Price + Contract Best Ask Price) / 2 – Index Price] / Index Price
- MA (Simple Moving Average): The average of the premium index over the previous 8 hours, calculated on a minute-by-minute basis.
This rate is calculated every minute. The funding exchange uses the most recently calculated rate at the time of the snapshot.
Updated Funding Rate Calculation
To provide a more professional trading experience, many platforms have adopted a new calculation formula. The updated logic is:
Funding Rate = clamp [Average Premium Index + clamp (Interest Rate – Average Premium Index, 0.05%, -0.05%), Funding Rate Cap, Funding Rate Floor]
Where:
Interest Rate: = 0.03% / (24 / Funding Interval)
- Example: For an 8-hour interval, Interest Rate = 0.01%.
- Premium Index: = [max (0, Depth Weighted Bid Price - Index Price) – max (0, Index Price – Depth Weighted Ask Price)] / Index Price
- Average Premium Index: Uses a weighted average of the premium index from the start of the last funding period up to the current minute.
This rate is also calculated every minute, with the snapshot using the most recent value.
Understanding Depth Weighted Price
The updated formula introduces the "Depth Weighted Bid/Ask Price," which provides a more robust measure of the market's center of gravity than the best bid/ask alone.
- Depth Weighted Bid (or Ask) Price = Depth Weighted Amount / Quantity of trading coins needed to fulfill the Depth Weighted Amount.
- Depth Weighted Amount = 200 × The contract's maximum leverage multiplier.
This calculation involves summing the order book from the best price outward until the cumulative value of orders meets the Depth Weighted Amount. The resulting average price from these orders is the Depth Weighted Price.
👉 Explore advanced trading calculators to model these scenarios
How to Calculate Your Funding Fee Payment
Once the funding rate is set, calculating the cost or credit to your account is straightforward. The formula differs slightly between USDT-margined and Coin-margined (inverse) contracts.
Funding Fee = Position Value × Funding Rate
For USDT-Margined Contracts
Position Value = Number of Contracts × Contract Face Value × Mark Price
Example:
You hold 10 long contracts of BTCUSDT.
- Mark Price = 60,000 USDT
- Contract Face Value = 0.01 BTC
- Funding Rate = 0.1%
Position Value = 10 × 0.01 × 60,000 = 6,000 USDT
Funding Fee (to pay) = 6,000 × 0.1% = 6 USDT
For Coin-Margined (Inverse) Contracts
Position Value = (Number of Contracts × Contract Face Value) / Mark Price
Example:
You hold 100 short contracts of ETHUSD.
- Mark Price = 4,000 USD
- Contract Face Value = 10 USD
- Funding Rate = 0.1%
Position Value = (100 × 10) / 4,000 = 0.25 ETH
Funding Fee (to receive) = 0.25 × 0.1% = 0.00025 ETH
How Funding Fees Are Collected and Distributed
The method of fee payment depends on your margin mode.
| Paying a Funding Fee | The full fee is collected. Note: This deduction can sometimes trigger a reduction in margin or even liquidation. Isolated Margin: Fees are deducted directly from the isolated position's margin. Open orders are not canceled. Cross Margin: Fees are deducted from the available equity in the relevant currency wallet in your cross margin account. Open orders are not canceled. |
| Receiving a Funding Fee | The full fee is credited to your account. Isolated Margin: Fees are added directly to the isolated position's margin. Cross Margin: Fees are added to the available equity in the relevant currency wallet in your cross margin account. |
Frequently Asked Questions
What happens if I don't have enough balance to pay the funding fee?
In isolated margin mode, if the funding fee deduction causes your position margin to fall below the maintenance margin level, your position may be liquidated. In cross margin mode, the fee is taken from your overall account equity, so it's crucial to maintain sufficient available balance to avoid unexpected liquidations.
Can I avoid paying funding fees?
Yes. The only way to avoid funding fees is to not hold an open position at the precise moment the funding snapshot is taken. Many traders strategically close positions just before a scheduled funding time and reopen them afterward if their market thesis remains unchanged.
Why did I receive a funding fee even though the rate was positive?
The direction of payment depends on your position, not just the sign of the rate. A positive rate means longs pay shorts. Therefore, if you are holding a short position during a positive funding rate period, you will receive the fee from the long position holders.
How does the funding rate mechanism prevent permanent price divergence?
The economic incentive is self-correcting. A high positive rate (longs paying shorts) makes it expensive to hold long positions, encouraging some longs to close and new shorts to open. This selling pressure helps push the contract price down toward the index price. The reverse is true for a negative rate.
Are funding fees predictable?
While the exact rate is calculated automatically, you can often anticipate its direction by observing the premium between the contract price and the index price. A significant and sustained premium typically leads to a positive funding rate.
Where can I see the next funding time and predicted rate?
Most major exchanges display the countdown to the next funding event and the currently predicted rate directly on the trading interface for each perpetual contract. Always check this information before entering a trade. 👉 View real-time funding rates and countdowns for various contracts