Perpetual Futures and Funding Rates
Contracts with no expiry date use a "funding rate" to stay close to spot: longs and shorts regularly pay each other a fee.
Risk warning: forex, CFDs, options, futures and crypto assets usually involve leverage or high volatility, and you can lose more than you put in. This lesson only teaches the concepts; all numbers are for illustration and are not investment advice.
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Text version · Crypto Basics, lesson 6: “Perpetual Futures and Funding Rates”
Contracts with no expiry date use a "funding rate" to stay close to spot: longs and shorts regularly pay each other a fee.
Contract above spot: longs pay
perpetual futures contracts never expire. When the contract trades above spot, the funding rate is positive and longs pay shorts; below spot, it's the other way round.
The higher the leverage, the closer the liquidation line
Magnify a position with leverage and a small move against you can wipe out the margin and trigger liquidation. At 10x leverage, about 10% against you is the end.
Two easy-to-miss details
Funding is calculated on position value, not on your leverage. Exchanges also require maintenance margin and charge fees, so the real liquidation price is closer than "losing all your margin".
Key takeaways
- Perpetual futures never expire, and you can go long or short with leverage.
- When the contract trades above spot, the funding rate is positive and longs pay shorts; otherwise shorts pay longs.
- Funding is charged on the position value, regardless of leverage, and keeps adding up if you hold for a long time.
- At high leverage a small move against you triggers liquidation. Because of maintenance margin and fees, the real liquidation price is closer than "losing all your margin".
Try it yourself
You can do these exercises in this lesson's interactive simulation:
- Click "Example 1": a +0.01% funding rate on a $10,000 long. How much have you paid after the first settlement?
- Drag the premium negative: which way does funding flow now? Switch to short: do you receive or pay?
- Click "Example 2": a 10x long meets a drop. Roughly how far has price fallen when it gets liquidated?
- Drag leverage from 2x to 20x and watch the liquidation line on the chart close in on the entry price.
Quiz and explanations
- 1. The funding rate is +0.01% (every 8 hours) and you hold a $10,000 long. After 8 hours…
- Answer: You pay $1.When the rate is positive, longs pay: $10,000 × 0.01% = $1.
- 2. You go long at 10x leverage. Roughly how far does the price need to fall to get close to liquidation (ignoring fees)?
- Answer: 10%.At 10x leverage, a 10% fall wipes out your margin; in practice liquidation comes a little earlier.
- 3. You hold a $20,000 short, the funding rate is −0.02% (every 8 hours), and funding settles 3 times a day. Over one day you…
- Answer: Pay $12.When the rate is negative, shorts pay longs: $20,000 × 0.02% × 3 = $12.
Terms in this lesson
- funding rate (Funding Rate): A fee longs and shorts pay each other at regular intervals on perpetual futures; when it's positive, longs pay shorts.
- leverage (Leverage): Controlling a large position with a small amount of margin; 1:100 means $1 controls a $100 position.
- liquidation (Liquidation): When your margin can no longer cover your losses, the system forcibly closes your position.
- maintenance margin (Maintenance Margin): The minimum margin your account must keep; fall below it and you'll be asked to top up.
- margin (Margin): The deposit set aside when you open a position = position value ÷ leverage.
- perpetual futures (Perpetual): A derivative contract with no expiration that uses the funding rate to keep its price close to spot.
- spot (Spot): A trade delivered and paid for right away (or very soon); its price is the spot price.