Funding Rate Explained

In crypto futures trading, funding fees refer to periodic payments made between traders to ensure that the futures price aligns closely with the spot price of the underlying asset, typically a cryptocurrency like Bitcoin or Ethereum.

These fees are designed to incentivize traders to keep the futures price in line with the spot price. If the futures price is trading above the spot price, traders with long positions pay funding fees to traders with short positions, and vice versa if the futures price is below the spot price.

Funding fees are calculated periodically, usually every 8 hours, and are based on the difference between the futures price and the spot price, as well as the prevailing interest rates. The exact formula for calculating funding fees can vary between different exchanges and platforms that offer crypto futures trading.

Overall, funding fees play a crucial role in maintaining the stability and efficiency of the crypto futures markets by helping to prevent significant deviations between futures prices and spot prices.