Recently, I noticed that many people are confused about how funding works on futures and why the spot price constantly differs from the futures price. I decided to understand it myself and share it because it’s really important for market comprehension.

So, funding is essentially the interest rate that traders pay to each other every eight hours when trading perpetual contracts. If you have an open long or short position, you either pay or receive this interest rate. Simple and clear.

Here’s how it works: if the funding rate is positive, longs pay shorts. If it’s negative, the opposite. And here’s an important point — leverage is also taken into account in the calculation. For example, if you invested $100 with 100x leverage, the funding is calculated on the full $10,000. This means that at a rate of -0.1%, you would receive $10, and if it were +0.1%, you would pay $10.

What’s the purpose of this? Funding is a mechanism that keeps the futures price close to the spot price. Without it, the contract price could diverge significantly. Regular futures with a fixed expiration date automatically converge, but perpetual contracts rely on funding.

If the funding rate is positive, it means the futures price is above the spot. Negative funding indicates the futures price has fallen below the spot. The higher the funding rate, the greater the divergence between them.

Price differences arise due to an imbalance between supply and demand. When many traders open leveraged longs, demand increases, the futures price rises above the spot, and the funding becomes positive.

What I’ve noticed is: when the asset is rising and the funding rate is high, most traders expect further growth and go long. But here’s the danger — not everyone can profit simultaneously; the market is a zero-sum game. Market makers don’t want to push the price up when so many longs are expecting a rise. Therefore, the higher the funding, the higher the likelihood of a reversal or correction.

The same applies to negative funding. If the price is falling and the rate becomes strongly negative, it indicates a bearish sentiment. Traders open shorts, and the lower the funding, the higher the chances of a reversal upward.

An important point: funding is a good indicator to complement your strategy, but not a standalone signal for entry. Use it as part of your analysis, but don’t rely on it alone.