How the funding rate works
The funding rate is a periodic payment between long and short holders of a perpetual contract, the mechanism that keeps the perp price tethered to the spot price. When the perp trades above spot, longs pay shorts; when it trades below, shorts pay longs. It is charged every few hours and is the cost, or occasional income, of holding a leveraged perp position over time.
Worked example
A perp trades slightly above spot because traders are aggressively long. The funding rate turns positive, say 0.01% every eight hours, paid by longs to shorts. Hold a $10,000 long through that period and you pay about $1; over many periods in a hot market, funding can become a significant drag. A heavily negative rate means shorts are crowded and paying longs instead.
Funding as a signal on Volity
Beyond its cost, the funding rate reveals market positioning: persistently high positive funding signals crowded longs, a setup that can unwind violently. On Volity, if you trade crypto direction through CFDs you avoid the perp funding mechanism entirely, but reading funding on perps elsewhere is a useful gauge of whether the crowd is dangerously one-sided. It is sentiment you can measure.
Why it matters
The funding rate is both a real holding cost and a crowd-positioning signal, so ignoring it means paying to hold a stretched position and missing a clear warning of a crowded trade. Read it before holding a perp. Related: perpetual contract and overnight financing.
Learn more in our crypto trading guide.
