About Funding Rates on Crypto
Every derivatives exchange uses funding mechanism on perpetual contracts. This maintains a balance between buy and sell ratio every 8 hours and it ensures the price does not deviate too much away from the index spot price.
Funding is a fee that is not charged by the exchange. They do not gain anything from this. Funding rate is peer-to-peer. It is a fee that is exchanged directly between longs and shorts.
Funding rate is calculated by the exchange and it varies over time on each exchange. If the rate is positive, then longs pay shorts. If the rate is negative, then shorts pay longs. The information on funding rate and fees will be displayed on the trading platform in advance.
If you close your position before the funding period then you’ll neither pay nor receive any fee from funding.
The funding fee only applies to perpetual contracts. Not to futures contracts.
Funding rate usually works against popular traders. If most traders are long BTC then the funding rate tend to increase and that confirms the buying interest. If more traders are shorting Bitcoin then funding rate tend to go negative and that confirms the selling interest.
The rate tend to vary as the trend turns bullish or bearish. If the rate diminishes then it shows less interest from traders. Do note that funding rate does not confirm that price for sure will move in a particular direction.
Reference: coinglass, coinguides