Perpetual Futures and Funding Rates in Crypto Explained

A perpetual futures contract has no expiry date. That single change removes the settlement mechanism that keeps an ordinary futures price tied to the spot market, so something else has to do the job.

That something is the funding rate: a payment passed between longs and shorts at fixed intervals. It is usually described as a small fee, which understates what it does to a leveraged position held for any length of time.

What follows sets out how the rate is actually calculated, what it costs measured against the margin posted rather than the contract size, and why the price that closes a position is not the price on the chart.

What a Perpetual Contract Is, and What It Replaced

A conventional futures contract has a settlement date. As that date approaches, the contract price and the spot price converge, because on the day they must be the same thing.

That convergence is what anchors an ordinary futures price. A trader who wants continuous exposure has to roll the position into the next contract as each one expires, paying the spread between them each time.

A perpetual contract removes the expiry. The position can be held indefinitely, and there is no roll. It is the reason these contracts dominate crypto derivatives volume, and our page on crypto futures covers where they sit alongside dated contracts.

Removing the expiry also removes the anchor. Without a settlement date forcing convergence, nothing structural stops the contract trading persistently above or below spot, and a derivative that drifts away from its underlying stops being useful as an exposure to it. Not every form of continuous exposure can be left at will, and staked ETH and its withdrawal queue is the clearest counter-example.

Funding is the replacement anchor. It does not force convergence the way settlement does; it makes divergence expensive to maintain, which is a weaker mechanism and behaves differently under stress.

Why Funding Exists When There Is No Expiry Date

Funding works by making the more crowded side of the contract pay the other side at regular intervals.

When the perpetual trades above spot, demand from longs is what pushed it there. Funding turns positive, longs pay shorts, and holding a long becomes progressively more expensive while being short earns a credit.

Those incentives pull in the direction that closes the gap. Some longs close, some traders open shorts to collect the payment, and the selling pressure moves the contract back towards spot.

When the perpetual trades below spot, the mechanism runs in reverse. Funding turns negative, shorts pay longs, and the incentive is to buy.

Two points about these payments are frequently missed. They pass between traders rather than to the venue, so funding is not a fee the exchange earns. And they are charged on the whole position at each interval regardless of whether it is showing a profit.

Because crypto markets never close, these intervals arrive around the clock, including through periods when nothing is being traded actively. Our page on crypto market hours covers what continuous trading changes about holding any position.

How the Funding Rate Is Actually Calculated

Most explainers give the formula as the premium index plus an interest rate. That is not what exchanges document, and the difference matters whenever the premium is large.

The premium index measures how far the perpetual is trading from the spot reference. The interest rate component is a fixed figure reflecting the cost of the borrowing the contract implies, and it is commonly set at 0.01 per cent per eight-hour interval.

The two are not added. The interest rate component is netted against the premium index and the result is clamped within a band before being combined. Aster documents the calculation as the average premium index plus the clamp of the interest rate minus the premium index, bounded at plus and minus 0.05 per cent, then scaled to the funding interval. Hyperliquid documents the same structure with the same bounds.

The practical effect of the clamp is that once the premium index moves beyond the band, the interest rate component stops contributing and the funding rate is driven almost entirely by the premium. A formula that simply adds the two overstates funding in exactly those conditions.

Intervals are not standard either. Eight hours is common, and Hyperliquid documents funding paid every hour at 0.00125 per cent, which is the same 0.01 per cent split across the eight hours. A rate quoted without its interval cannot be compared with one quoted on a different schedule.

At the default rate alone, holding a long through every interval costs 0.01 per cent three times a day, which is 10.95 per cent of notional over a year before any premium is added. That baseline is a structural cost of the instrument rather than a market view going against the position.

What Funding Costs Against Your Margin, Not Your Notional

Funding is always quoted as a percentage of notional, and that is the number most explanations work with. It is the wrong denominator for judging the cost.

A trader’s return is measured against the margin posted, not against the contract size the leverage produces. Expressing funding the same way changes the figure by the leverage multiple.

Take a rate of 0.03 per cent per eight-hour interval. On a 10,000 dollar position that is 3 dollars per interval and 9 dollars a day, which is the way it is usually presented and sounds negligible.

Now measure it against margin. Three intervals a day makes 0.09 per cent of notional. At 10x leverage the notional is ten times the margin posted, so the same funding is 0.9 per cent of the margin every day.

Held for a month at that rate, funding alone consumes about 27 per cent of the posted margin. The price has not moved, the position has not been wrong, and more than a quarter of the capital committed to it has gone.

The arithmetic is not a prediction. Funding rates move continuously and can turn negative, in which case the same position is being paid rather than charged. The point is that the leverage which magnifies the price move magnifies the financing identically, and a margin calculator shows how small the posted amount is relative to the notional it controls.

Mark Price, Index Price, and Which One Liquidates You

Three different prices exist for the same contract at the same moment, and confusing them produces the most common complaint about these venues.

The last traded price is the price of the most recent transaction on that venue. It is what the chart usually displays, and on a thin order book a single large order can move it a long way for a moment.

The index price is a reference built from spot prices across several external exchanges, weighted so that no single venue dominates. It represents the wider market rather than one order book.

The mark price is the contract’s fair value, anchored to the index and adjusted for the contract, usually with smoothing applied so that brief outliers do not carry through.

Liquidation is triggered from the mark price. Unrealised profit and loss is calculated from it too. The last traded price, the number most traders are watching, is not what closes the position. What happens after that trigger, and where any shortfall goes if the close misses, is set out in how a liquidation is actually settled.

This is a deliberate design choice rather than an inconvenience. If liquidation ran on the last traded price, one large order on a thin book could push the price through a cluster of liquidation levels, and the forced closures would generate more pressure in the same direction. Anchoring to an external index makes that far harder to engineer.

The consequence for a trader is the reverse of what it sounds like. A wick on the chart that never reached your liquidation level on the mark price will not close you, and a mark price that moved while your venue’s own chart looked calm can. Neither outcome is an error, and both are surprising if the distinction was not understood beforehand.

Reading Funding as a Positioning Signal

Because funding reflects which side of the contract is crowded, it carries information about positioning that the price alone does not.

Persistently positive funding indicates sustained demand from longs paying to keep the position open. Persistently negative funding indicates the same from shorts.

What that information supports is a description of positioning, not a forecast. A crowded side can stay crowded for a long time, and funding gives no indication of when or whether that changes.

Its more reliable use is as a cost input. A rate that has been elevated for days tells a trader what holding a position on that side will cost, which is a question with a definite answer, unlike the question of what happens next.

Funding also interacts with leverage in a way that is easy to overlook. Because payments are deducted from margin, a sustained adverse funding rate moves the liquidation price closer over time even while the market price stands still, and the mechanics of that sit with ordinary risk management.

Who Should Not Hold Perpetuals

The instrument suits short holding periods and specific purposes, and several uses fit it badly.

Anyone wanting exposure over weeks or months is the clearest case. Over that horizon cumulative funding, rather than the price move, can determine the outcome, and buying the asset outright carries no such charge.

Anyone who cannot state the current funding rate and its interval before opening a position is the second. Those two figures determine the cost of holding it, and neither is inferable from the chart.

Anyone treating the last traded price as the level that governs their position is the third. Liquidation runs on the mark price, and a stop reasoned from the wrong price is not the protection it appears to be.

Anyone using high leverage on a position they intend to leave open is the fourth, because the leverage multiplies the financing cost against margin at exactly the rate it multiplies the price exposure.

These contracts are also unavailable or restricted for retail clients in a number of jurisdictions. Availability should be checked before an account is funded, and our page on how to open a crypto trading account covers what the account-opening process involves.

Frequently Asked Questions

What is a perpetual futures contract?

It is a derivative that tracks an underlying asset with no expiry or settlement date, so a position can be held indefinitely without rolling into a new contract. Because there is no settlement to force the contract price and the spot price together, a periodic funding payment between traders performs that job instead.

Who pays the funding rate?

Traders pay each other, not the exchange. When funding is positive, holders of long positions pay holders of short positions; when it is negative, shorts pay longs. The venue transfers the payment rather than collecting it as revenue.

How often is funding charged?

It depends on the venue. Every eight hours is common, and Aster documents an eight-hour default interval, while Hyperliquid documents funding paid every hour at 0.00125 per cent, which is the same eight-hour rate divided across the hours. A funding rate quoted without its interval cannot be compared with one on a different schedule.

What is the difference between mark price and last price?

The last price is the most recent trade on that venue and is what the chart normally shows. The mark price is a fair value anchored to an index of spot prices from several external exchanges, and it is the price used to trigger liquidation and to calculate unrealised profit and loss.

Can funding cost more than the price move?

Yes, over a long enough holding period. At 0.03 per cent per eight-hour interval with 10x leverage, funding runs at roughly 0.9 per cent of posted margin a day, which is about 27 per cent over thirty days if the rate persists. Rates change continuously and can turn negative, so this is arithmetic for one fixed rate rather than a forecast.