Funding Rate

A perpetual future is a futures contract that grants you the ability to long or short on a contract that never expires. Rather, there is a funding rate every 8 hours that is exchanged between longs and shorts that keeps the perpetual asset pegged to the spot price. If spot trades higher than the perpetual, then funding will be negative and if spot trades lower than the perpetual then funding will be positive. 

If funding is positive, shorts will be paid by longs. If funding is negative, longs will be paid by shorts. The funding payment is typically done every 8 hours at midnight UTC, 8:00 UTC, and 16:00 UTC. The funding payment made is simply the funding rate % (displayed on every perpetual asset typically at the top of the page) multiplied by the notional value of your position. If you are short 100 ETH, the current price is 2000, and the funding rate is 0.01%: then you would earn 20 dollars in funding every 8 hours (100 x 2000 x 0.01%). 

There is an interesting and incredibly important inverse relationship between basis and the funding rate. If the basis becomes very positive (spot trading higher than perp), then the funding rate will become very negative. If the basis becomes very negative (spot trading lower than perp), then the funding rate will become very positive. However, due to arbitrage — the basis rarely stays negative.

This exact feature is the reason why this course, and the trading system works. The reason why the basis cannot stay negative is because if it did, every smart trader would very quickly and easily buy spot and short the perp. If they did so, they would earn from the positive funding rate AND get to buy spot cheaper than where they sold the perp. This is incredibly important because it means that if you buy basis at a good % rate — it is tough to lose money on the basis moving against you.

That being said, whenever you are long basis you will be paying funding if the funding rate is negative (because you are short the perp). And, if the price of a crypto surges: the funding rate typically turns negative. However, this is strangely to your advantage. If the funding rate becomes more and more negative, that typically means that basis is becoming more and more positive. If basis is becoming more and more positive than you can close out your position(s) before the funding rate interval.