Funding Rates: The Cost of Being Wrong
Open interest tells you how much money is in the game. Funding rates tell you which side is paying to play.
When funding rates hit extremes, overleveraged traders are about to get punished.
What Are Funding Rates?
Perpetual futures never expire, so funding rates keep perpetual prices aligned with spot. Every 8 hours, one side pays the other:
- •Positive funding: Longs pay shorts. Market is net long.
- •Negative funding: Shorts pay longs. Market is net short.
- •Neutral: Market balanced.
How They Work
At +0.01% funding with a $100K position:
- •Pay $10 every 8 hours = $30/day
At +0.1% funding (extreme):
- •Pay $100 every 8 hours = $300/day = $2,100/week
Extreme funding makes holding expensive, creating pressure.
Why Extremes Signal Opportunities
High funding = crowded trades. When everyone piles on one side:
Extreme positive funding:
- •Most traders long, paying to hold
- •Any negative catalyst triggers cascade
- •Price drops → longs close → more drops → liquidations → crash
Extreme negative funding:
- •Most traders short, paying to hold
- •Any positive catalyst triggers squeeze
- •Price rises → shorts cover → more rises → liquidations → rally
Extreme funding creates fragility. Markets at extremes snap back.
Thresholds (BTC)
| Rate | Interpretation |
|---|---|
| -0.1% or below | Heavily short, squeeze territory |
| -0.01% to +0.01% | Neutral |
| +0.03% to +0.05% | Moderately bullish |
| +0.1% or above | Heavily long, crash territory |
Signals We Watch
1. Funding/Price Divergence Price rising + funding flat = sustainable. Price rising + funding spiking = crowded, watch for reversal.
2. Funding Reset Extreme funding normalizing often coincides with trend resuming after brief counter-move.
3. Persistent Extremes Funding staying extreme for days = violent snap-back when it occurs.
Common Mistakes
- •Trading funding alone - "Funding is +0.1%, shorting" loses. Extreme can get more extreme.
- •Ignoring time component - Funding accrues every 8 hours. Timing matters.
- •Conflating exchanges - Binance +0.1% while Bybit +0.03% are different populations.
How We Use Funding
As a filter: Cautious about LONG signals when funding extremely positive.
As a condition: Some edges only activate at certain funding levels.
Funding provides context that sharpens other edges.
Key Takeaways
- •Funding keeps perpetual prices aligned with spot
- •Extreme funding reveals crowded trades
- •Crowded trades snap back violently
- •Use as filter and context, not standalone signal
- •Aggregate across exchanges for cleaner reads
Next Lesson
We've covered open interest and funding. Next: Liquidation Levels—where prices get pulled and why cascades happen.