Funding Rate in Trading: How to Earn on Positive and Negative Funding

Funding Rate in Crypto: What Is It and How to Earn From It?

The cryptocurrency market provides its participants with numerous opportunities for earning. There are those that do not require serious preparation, such as arbitrage and staking. There are also trading and investing, which require a deeper understanding of market mechanics and processes.

However, there is an even more complex method—at least for beginners in the market—of extracting profit from cryptocurrencies: funding, or the funding rate. In this article, we will analyze what funding is, how it works, how profit can be generated with its help, and much more.

What Is Funding?

Definition of Funding

Funding, or the funding rate, is a mechanism that was first used in the perpetual futures market. Its essence lies in maintaining the futures price close to the spot price of the underlying asset: every few hours, traders holding perpetual futures either receive or pay a certain amount of funds to maintain prices. If the futures price exceeds the spot price, the funding rate becomes positive, and traders in long positions pay those in short positions. If the opposite occurs, the rate is negative, and short traders pay the longs.

Positive and Negative Funding

Positive funding indicates a prevalence of long positions in the market, which may signal bullish sentiment among participants. Negative funding, conversely, speaks to a dominance of short positions and bearish sentiment. These rates are adjusted by exchanges several times a day, usually every 4 or 8 hours, to incentivize traders to open positions that contribute to aligning prices between the futures and spot markets.

How Funding Works in Trading

General Mechanics of Funding

Unlike fixed-term futures, perpetuals do not have an expiration date—this is precisely why the contract price and spot price often diverge. Funding was introduced as a countermeasure to this: through it, platforms nudge traders to open new positions, which subsequently aligns prices across different markets. The funding rate is calculated based on the difference between the futures price and the spot price, and also takes into account interest rates and risk premiums.

Funding on Various Exchanges (Binance, Bybit, MOEX)

Binance

On Binance, funding is calculated every 8 hours. The exchange provides information on the current and predicted funding rate, as well as a history of previous rates. This allows traders to make informed decisions when opening and holding positions.

Bybit

Bybit also uses a funding mechanism with calculations every 8 hours. The platform provides transparent information on funding rates, making it popular among traders who use strategies based on funding.

Moscow Exchange (MOEX)

On the Moscow Exchange, funding is applied in perpetual futures on currency pairs, such as USD/RUB. Here, the financing rate depends on interest rates and liquidity, rather than solely on trader behavior.

Ways to Earn on Funding

Now that we have sorted out the term itself, we need to understand how one can earn from it.

Arbitrage

Arbitrage using funding involves opening opposite positions on different exchanges where financing rates differ. For example, if the rate is positive on one exchange and negative on another, a trader can open a long on the exchange with the negative rate and a short on the exchange with the positive rate, earning on the difference in payments.

Also, a strategy of spot + futures is practiced quite often: on the spot market, the asset is bought cheaper, while on the futures market, a short position is opened at a higher price. Here it is important to remember that with positive funding, holders of long futures pay holders of short positions. Given that the price will sooner or later align, in an ideal scenario, the trader will receive profit from:

Price convergence. The spot price will rise, the futures price will fall—profit in both cases;

Positive funding will also ensure profit growth, and at certain moments it can be even greater than from price convergence. For example, the price on spot and futures markets might not converge for a day—during this time, the trader can receive 6 funding rewards.

The most important thing in this strategy is to regularly monitor the funding rate. The exchange may change it depending on the market situation, due to which all potential profit is negated by new conditions.

Hedging

Hedging using funding allows traders to protect their positions from unfavorable market movements. For example, by holding an asset on the spot market and opening an opposite position on the futures market, a trader can receive funding payments which, in theory, can help avoid drawdowns.

Unobvious Ways to Earn

Funding Scalping: Opening a position immediately before the funding calculation and closing it right after receiving the payment. A fairly common strategy; however, large funding rates are logical during moments of high market volatility, and this can bring substantial losses that funding will not cover;

Funding in a Flat Market: Using funding in conditions of low volatility, when the asset price remains stable. Another extremely popular method of extracting profit from cryptocurrencies. When the market is sideways, one need not fear sudden price changes, although in the case of cryptocurrencies, there is a probability that a single candle could wipe out all earnings from the funding rate.

Trading Against Crowd Sentiment: Opening positions opposite to the prevailing market sentiment, based on high funding rates. For example, during a market correction, everything falls quite rapidly. Short positions prevail in futures, causing the funding rate to be negative and extremely high. One can open a long position, but this must be done with all caution, and one should at least conduct a technical analysis of the market: if the fall drags on, losses will not be covered. On the other hand, everything depends on capital: one can wait out the drawdown, receiving the funding rate all this time, and then close the position at the initial price or higher.

Additional Strategies for Earning on Funding

Using Funding in Low Volatility Conditions

In periods of low volatility, when the asset price fluctuates within a narrow range, traders can use a strategy of holding a position with the goal of receiving funding. It is important to consider that the potential profit from funding must exceed possible losses from minor price fluctuations.

Combining Funding with Other Trading Strategies

Funding can be effectively combined with other strategies, such as scalping or swing trading. For example, a trader can open positions in the direction of the current trend while simultaneously receiving funding payments. This allows for increasing the total profit from trading.

Using Funding Within Algorithmic Trading

Algorithmic traders can develop bots that automatically open and close positions depending on current funding rates and other market conditions. Such systems allow for reacting quickly to market changes and extracting profit from short-term opportunities.

Funding and Its Impact on the Cryptocurrency Market

How Funding Affects Crypto Prices

Funding rates can serve as an indicator of market sentiment. High positive rates indicate an overheated market, which may foreshadow a correction. Conversely, negative rates may signal the possibility of an asset price increase. Thus, analyzing funding helps traders make informed decisions.

Funding in Market Analysis

The funding rate cannot be used as the primary tool for market analysis. A certain asset may be overheated only based on the crowd, and not on technical analysis, for example. Funding needs to be used in combination with other technical indicators, such as RSI or trading volumes, for more accurate forecasting of market movements. For example, high funding rates combined with overbought conditions on RSI may indicate an upcoming correction.

Instruction on Earning with Funding

Choose a liquid asset on the exchange. Popular cryptocurrencies such as BTC, ETH, and SOL are ideal, as they have high liquidity and stable interest from traders. Liquidity is important because it reduces the spread between buying and selling prices and ensures sufficient trading volume necessary for effective trade execution;

Check the funding rate. Before opening a position, assess the current and predicted funding rate. This data is usually available in the futures information section of the selected exchange. It is also useful to look at the history of rates—if funding is consistently positive or negative, this can be a good indicator for planning a strategy.

Open a position in the necessary direction. If the rate is positive, open a short position to receive payments from long traders. If negative, do the reverse and open a long. It is important to consider that you are also subject to market risks: if the asset price moves against your position, you may incur losses exceeding the profit from funding;

Use a hedging strategy. To minimize risk from price movement, open an opposite position on the spot market. For example, by buying the asset on spot and selling it via a perpetual future, you insure yourself against price fluctuations but retain the opportunity to earn on funding.

Control the collateral level and avoid liquidation. Risk management is a key element of a successful strategy. Regularly check margin requirements and keep a sufficient reserve in the account to avoid forced position closure. Even if funding promises profit, market movement against you can lead to losses.

Regularly lock in profits. Do not forget to take profits from funding, especially if you use complex arbitrage schemes. It is also worth considering commissions for opening and closing positions, as well as for using borrowed funds (if using leverage).

How to Prevent Liquidation on Futures

Funding itself does not cause liquidation; however, futures trading is associated with leverage and high risk. To avoid losing your deposit, certain principles must be observed:

Moderate leverage. Do not use maximum leverage, especially if you are not confident in your position. Start with the minimum (1x-3x) to reduce risks;

Constant position monitoring. Watch the market, the funding rate, and margin in real-time. Set notifications or use trading bots if you do not have the opportunity to be constantly online;

Use of Stop-Losses. Set a stop-loss level that will automatically close the position upon reaching a certain loss. This will help you limit losses;

Reserve on the account. Always keep additional funds on the futures account to maintain margin. This is a "safety cushion" in case of a sudden spike in volatility;

Understanding the liquidation price. Find out at what level liquidation of your position occurs. Exchanges show this data when opening a trade—it is important to consider it when calculating entry into a position.

Risks and Limitations When Using Funding

Market Volatility

High volatility can lead to significant losses, especially when using leverage. It is important to consider that even with positive funding, unfavorable price movement can outweigh the profit obtained.

Changing Funding Rates

Funding rates are not fixed and can change depending on market conditions. Traders must regularly track these changes to timely adjust their positions.

Commissions and Costs

When opening and closing positions, traders incur certain costs in the form of commissions. These expenses can substantially reduce the total profit from the strategy, especially with frequent trades.

Conclusion

Funding is a powerful tool that can both bring stable income and be a source of increased risk if used incorrectly. Its main goal is maintaining the price balance between perpetual futures and spot markets, but for a trader, it is also an opportunity to build a profitable strategy.

The main thing in working with funding is to understand how it is calculated, know how to use it in your interests, and manage risks. Experienced traders earn not only on price movement but also on such less obvious mechanisms as the funding rate.

If you are just starting, we recommend studying funding in demo mode or with minimal volumes—this way you will gain practical experience without serious losses.

Frequently Asked Questions (F.A.Q.)

How to use funding in trading?

Funding can be used to generate passive income by holding a position in the direction of the payment. For example, if the rate is positive, it is profitable to open short positions and receive payments every 8 hours. One can also build arbitrage strategies using the difference in rates on different exchanges.

What influences funding?

Several factors influence the funding rate:

The difference between the futures price and the spot price of the asset;

General market sentiment (longs vs. shorts);

Asset volatility;

General interest in a specific cryptocurrency;

The policy of a specific exchange.

Funding is a dynamic indicator; it can change abruptly, especially during periods of high market volatility.

Where to watch crypto funding?

Funding can be tracked:

On the exchange website in the futures section (Binance, Bybit, OKX, etc.);

Through analytical services such as Coinglass, TradingView, Arbitragescanner (there are separate indicators for displaying the funding rate);

In Telegram bots and automated alert systems.