Foundations · Lesson 9 · Beginner
Funding Rate
You understand how the funding rate ties perpetuals to spot and serves as a sentiment signal.
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Mechanics
Because a perpetual has no expiry date, the funding rate ties its price to the index. It is paid periodically directly between longs and shorts, typically every 8 hours.
As a sentiment signal
Positive funding means longs pay shorts, bullish sentiment. Extreme values are a contrarian signal: in early 2021, above 100 percent per year near a top.
Read the signals and decide.
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The key points at a glance
- Funding is paid periodically directly between longs and shorts, not to the exchange.
- Extreme funding is a contrarian warning signal.
Deep dive
Why you pay funding even though you are winning
The funding rate flows directly between longs and shorts every eight hours, not to the exchange. When it is positive, longs pay shorts. It is an ongoing cost, independent of the price movement.
Murphy counts funding among the holding costs, which turn brutal in ranging phases. Perpetuals are an instrument for short holding periods. Anyone trying to buy and hold a leveraged perp is paying for the privilege of being liquidated.
Funding as a sentiment signal
Extreme values are a contrarian warning sign. When the market pays you to take a direction, the big money is often already on the other side. This is the same logic as Elder's bullish consensus.
- Early 2021: funding above 100 percent p.a., extreme mania, near a top
- Summer 2021: around 60 percent p.a. to go long, panic, near a bottom
- Never read funding in isolation, always combine it with open interest
- High OI at the top plus extreme funding is fuel for a cascade
Reading funding and open interest together
For your entry it is enough that extreme funding curbs your greed, it is not a buy signal. A strong technical setup stays the foundation, funding and OI are only the extra filter.
- Price up plus OI up: fresh capital is driving the trend
- Price up plus OI down: short squeeze, the move is borrowed
- Price down plus OI up: new shorts are pushing into the market
- Price down plus OI down: longs are capitulating and closing
Sources: Goodman, Elder, Murphy
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