The mechanism of the funding rate in crypto trading.
The funding rate consists of 2 main parts: interest rate and premium index.
1. Interest Rate
The interest component reflects the cost of capital. In crypto trading, this often shows the borrowing cost spread between the quote currency (e.g., USD) and the base currency (e.g., BTC). This interest rate is usually small and relatively stable.
2. Premium Index
The premium index measures the spread between the perpetual futures contract price and the spot price of the underlying asset. When the perpetual futures price is higher than the spot price, the premium fee will be positive, indicating strong buying demand. Conversely, when the perpetual futures price is lower than the spot price, the premium fee will be negative, indicating strong selling pressure.
How to calculate the funding rate
The funding rate is calculated based on interest rates and the premium index value. However, the exact formula may vary by exchange. Make sure you fully understand the funding rate mechanism on the exchange you're using before taking on any risk.
Funding rate for Binance Futures
Binance Futures uses a fixed interest rate (unchanging), assuming that holding assets equivalent to cash will yield a higher interest rate than holding crypto assets. By default, the interest rate is fixed at 0.03% per day, split into 3 fundings of 0.01% (which means one funding every 8 hours).
On Binance Futures, you can view the current funding rate and count down to the next payment in the trading interface.
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