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What a perp is and how funding works

Lesson 13 · about 10 min

A perpetual future, or "perp", is crypto's dominant instrument. More volume trades in BTC perps than in BTC itself, and most of the sharp moves you see on a spot chart started as liquidations in the perp market. Before you can trade one safely, or even interpret the spot market well, you need to understand the mechanism that keeps a contract with no expiry attached to the price of the real thing.

A future with no expiry

A traditional future is a contract to buy or sell at a set date. As the date approaches, the future's price converges to spot because it has to. A perp removes the date: you can hold it forever. That creates a problem. With nothing forcing convergence, why would the perp's price stay anywhere near the spot price?

The answer is funding: a periodic payment between longs and shorts, set by how far the perp is trading from spot, that makes the crowded side pay the other side until the gap closes.

How funding works

Every funding interval (8 hours on most exchanges, 1 hour on some), the exchange calculates a funding rate from the average premium of the perp over the spot index during the interval.

  • Perp above spot → positive rate → longs pay shorts.
  • Perp below spot → negative rate → shorts pay longs.

The exchange does not take the payment; it moves directly between traders' margin balances. The payment is:

funding payment = position notional × funding rate

Note that it is charged on the full notional of the position, not on your margin. Leverage does not reduce it; it magnifies it as a percentage of what you posted.

Worked example

You are long 0.5 BTC on a perp at $60,000, so notional = $30,000. Your margin is $3,000 (10x). The funding rate for the next interval is +0.01%, paid every 8 hours.

  • Payment per interval = 30,000 × 0.0001 = $3.00, paid by you to shorts.
  • Per day (3 intervals) = $9.00.
  • As a percentage of your $3,000 margin: 0.3% per day.
  • Annualised: 0.01% × 3 × 365 = 10.95% of notional, which at 10x is about 110% of your margin per year.

Now suppose the market gets euphoric and the rate rises to +0.10% per interval, which happens during strong rallies:

  • Per interval = 30,000 × 0.001 = $30.
  • Per day = $90, or 3% of margin.
  • A two-week hold costs $1,260, 42% of the margin, without the price moving at all.

If instead the rate were −0.05% (perp below spot, crowded short), you as a long would receive $15 per interval.

Key idea: Funding is a periodic transfer from the crowded side to the other side, charged on the full notional. It is what tethers a perp to spot, and on a leveraged multi-day hold it can cost more than your expected profit.

Reading the funding rate as information

Because funding measures how crowded one side is, it doubles as a sentiment gauge:

Funding (per 8h) Annualised Meaning
around +0.01% ~11% Neutral; this is the default "interest" component
+0.05% to +0.10% 55% – 110% Longs crowded; squeezes down become more likely
above +0.10% >110% Extreme; holding long is very expensive
negative Shorts crowded; squeezes up become more likely

Extreme funding does not predict direction on its own, but it tells you which side will be forced to close if the price moves against it, and forced closes (liquidations, next lesson) are what produce cascades. A rally with funding at +0.15% is a rally that longs are paying a fortune to stay in.

Predicted versus applied

Exchanges show a "predicted" or "next" funding rate that updates continuously through the interval, and then the applied rate at the boundary. Only positions open at the exact funding timestamp pay or receive. Some traders close just before funding and reopen after to dodge a large payment; the fees and slippage on that round trip usually cost more than the funding did, and the price often moves in the seconds around the timestamp for the same reason.

Where funding goes in your plan

Treat funding as a cost of carry, the way a futures trader treats the spread to spot or a stock trader treats margin interest:

  1. Before entering, look at the current and predicted rate.
  2. Multiply by your intended holding period and notional.
  3. Add the result to your fees and slippage, and check that the trade's expected R-multiple still covers it.
  4. If you intend to hold for days with leverage, size and stop for the funding you will pay, not just the price.

Try it: Find the current funding rate on a BTC perp and note the interval. Compute what a $20,000 long would pay or receive per day and over a 10-day hold. Then look up the highest funding rate on that pair over the last year and repeat the calculation.

Recap

  • A perp is a future with no expiry; funding is the mechanism that keeps its price near spot.
  • Positive funding: longs pay shorts. Negative: shorts pay longs. Paid every interval, usually 8 hours.
  • Funding is charged on full notional, so leverage magnifies it as a share of margin.
  • The rate is a sentiment gauge: extreme values mean one side is crowded and vulnerable to a squeeze.
  • Include funding as a cost of carry when sizing any leveraged hold that lasts longer than a session.

See it drawn

Original diagrams for the ideas on this page. Illustrative, not real market data.

Margin and leverageA small deposit controlling a much larger position, and the point at which losses trigger a margin call.Position you controlnotional value $100,000your margin deposit: $5,000$100,000 / $5,000 = 20:1 leverageYour deposit absorbs every dollar of loss$5,000$2,500$0Equity leftMARGIN CALLequity has fallen to $2,5000%1%2%2.5%3%4%5%How far the price moves against you
Margin and leverage. A $5,000 deposit can control a $100,000 position, which is 20:1 leverage. Because the loss is measured on the full $100,000, a 2.5% move against you halves the deposit and brings a margin call, and a 5% move uses all of it.
Slippage on a market orderA buy order clears four price levels, so the average price paid is worse than the price first quoted.Buy 1,000 shares at marketpricesell orders resting (bar length = size)20.04300 shares20.03200 shares20.01200 shares20.00300 sharesnothing resting at 20.02order sweeps up the bookaverage fill 20.02SLIPPAGE0.02 a share$20.00 in totalintended 20.00Each level fills at its own price; the average is what you really paid.
Slippage on a market order. You click at 20.00, but only 300 shares are resting there, so the rest of the order fills at 20.01, 20.03 and 20.04. The average price paid is 20.02, and that two-cent gap is slippage.
Contango and backwardationTwo futures curves against contract expiry: one rising above spot, one falling below it.The same commodity, priced for delivery at different dates.78.0076.0074.0072.0070.00Futures pricespot+1m+2m+3m+4m+5m+6mMonths until the contract expiresspot price74.00CONTANGOlater contracts cost more than spotBACKWARDATIONlater contracts cost less than spot
Contango and backwardation. A futures curve shows what buyers will pay for delivery in one month, two months and so on. When later contracts cost more than the spot price the curve is in contango; when they cost less it is in backwardation.