BeaconFunding Rates Explained
The funding rate is a periodic payment exchanged between traders holding long and short positions in perpetual futures contracts. Its primary purpose is to keep the perpetual contract price closely aligned with the underlying spot market price. Without the funding rate, there would be no mechanism to prevent the perpetual price from drifting arbitrarily far from reality.
Think of the funding rate as a balancing force. When too many traders are long and pushing the perpetual price above the spot price, the funding rate turns positive - meaning longs must pay shorts. This creates a financial incentive for traders to close longs or open shorts, bringing the price back in line. The reverse happens when shorts dominate and push the perpetual price below spot.
The funding rate is not a fee paid to the exchange or platform. It is a peer-to-peer payment between traders. The exchange simply facilitates the transfer. This means that while one side is paying, the other side is earning - making the funding rate an opportunity as well as a cost.
How Funding Is Calculated on Hyperliquid
On Hyperliquid, funding is calculated and settled every 8 hours at 00:00, 08:00, and 16:00 UTC. The rate is determined by the premium or discount of the perpetual price relative to the spot oracle price over the preceding interval. When the perpetual trades at a sustained premium to spot, the funding rate increases. When it trades at a discount, the rate decreases or turns negative.
The actual funding payment you receive or owe is calculated as: Position Size multiplied by the Funding Rate. For example, if you hold a $10,000 long position and the funding rate is 0.01%, you would pay $1.00 at the next funding interval. With three intervals per day, that amounts to $3.00 per day, or approximately $1,095 per year.
You can estimate your funding costs for any position size and rate using our funding rate calculator. Understanding these costs before entering a trade helps you evaluate whether a position is worth holding over time.
Positive vs. Negative Funding Rates
A positive funding rate indicates that the perpetual contract is trading at a premium to the spot price. This typically happens during bullish market periods when demand for long positions outweighs short interest. In this scenario, long holders pay short holders. Consistently high positive funding suggests the market is overleveraged to the upside and may be vulnerable to a correction.
A negative funding rate means the perpetual is trading below the spot price, typically during bearish sentiment when short demand exceeds long demand. Here, short holders pay long holders. Persistent negative funding can signal excessive fear in the market and may precede a bounce, as the cost of maintaining shorts increases.
Experienced traders watch funding rates across multiple assets on the markets page as a sentiment indicator. Extremely high or low funding rates often precede market reversals, because the cost of maintaining one-sided positions eventually becomes unsustainable.
Impact on Your Trading Costs
Funding rates are an often-overlooked cost of trading perpetual futures. For short-term scalpers who hold positions for minutes or hours, funding is usually negligible. But for swing traders and position traders who hold for days or weeks, funding can significantly eat into - or add to - profits.
Consider a scenario where you are long BTC with a $50,000 position during a bull run. If the funding rate averages 0.05% per 8-hour interval, you are paying $25 three times a day - that is $75 daily or $525 per week. Over a month, that is over $2,200 in funding costs alone. Your trade must generate more than $2,200 in price appreciation just to break even.
Conversely, if you are on the receiving side of funding (e.g., short during positive funding, or long during negative funding), those payments add to your returns. Some traders build entire strategies around capturing funding payments, a practice known as funding rate farming.
Trading Strategies Around Funding Rates
Several proven strategies revolve around funding rate dynamics. The most popular is the cash-and-carry trade: buy the asset on spot and simultaneously short it on the perpetual market. You are market-neutral (price movements cancel out), but you collect the funding payments when rates are positive. This is a low-risk way to earn yield, similar to a fixed-income strategy.
Funding rate mean-reversion is another approach. When funding rates spike to extreme levels, they tend to revert to normal. Traders can fade the crowd - going short when funding is extremely positive (expecting a pullback) or going long when funding is extremely negative (expecting a bounce). This is a contrarian strategy that requires careful timing and risk management.
Finally, some traders simply factor funding into their trade planning. Before opening a perpetual futures position, they check the current funding rate and estimate the cost of holding the position for their intended duration. If funding costs exceed the expected profit from the trade, they may wait for better conditions or adjust their position size.