Introduction to Funding Rate

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Understanding the funding rate is essential for anyone trading perpetual contracts in the derivatives market. This mechanism ensures that the price of perpetual futures stays closely aligned with the underlying spot price, preventing prolonged deviations. In this guide, we’ll explore how funding rates work, how they are calculated, and why they matter to traders.

What Is a Funding Rate?

The funding rate is a periodic payment exchanged between long and short traders in perpetual futures markets. It occurs at fixed intervals—commonly every 8 hours—and helps anchor the contract price to the mark price (a fair value derived from the spot market). On platforms like Bybit, this rate updates every minute and fluctuates based on market conditions until the next funding timestamp.

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For example:

This regular exchange prevents traders from indefinitely holding positions without cost, especially when one side of the market (longs or shorts) dominates.

How Is the Funding Rate Calculated?

The funding rate consists of two core components:

  1. Interest Rate (I)
  2. Average Premium Index (P)

These are combined using a time-weighted average formula to determine the final rate paid or received by traders.

Formula Overview

Funding Rate (F) = Average Premium Index (P) + clamp (Interest Rate (I) − Average Premium Index (P), 0.05%, −0.05%)

Here’s what this means:

This ensures stability and prevents extreme swings in funding costs during volatile periods.

Breaking Down the Components

Interest Rate (I)

The interest rate reflects the cost of carry and is typically fixed at 0.03% per year, prorated based on the funding interval.

Interest Rate (I) = 0.03% / Funding Interval

Where:

For an 8-hour funding cycle:

Note: Some pairs like USDCUSDT or ETHBTCUSDT have a default interest rate of 0%, meaning funding is driven entirely by market premiums.

Premium Index (P)

When perpetual contracts trade above or below their fair value, a premium index adjusts the funding rate to correct imbalances.

Premium Index (P) = [Max(0, Impact Bid Price − Index Price) − Max(0, Index Price − Impact Ask Price)] / Index Price

Key terms:

The Impact Margin Notional (IMN) determines how much base currency can be traded with a given margin. It's expressed in USDT and used to assess order book depth.

To calculate base coin quantity:

Base Coin Quantity = IMN / [(Bid1 + Ask1) / 2]

This calculation ensures that even in deep markets, funding accurately reflects real execution prices.

Time-Weighted Average: Why Timing Matters

Bybit uses an N-hour Time-Weighted Average Price (TWAP) to compute both the Interest Rate and Average Premium Index every minute. As the funding timestamp approaches, more weight is given to recent data.

For an 8-hour window (480 minutes):

Average P = (P₁×1 + P₂×2 + ... + P₄₈₀×480) / (1+2+...+480)

This arithmetic progression emphasizes later values, making the system responsive to last-minute market shifts.

If the interval were 4 hours (240 minutes), coefficients would run from 1 to 240.

Special Case: Pre-Market Perpetual Contracts

Pre-market perpetuals follow different rules depending on the trading phase:

  1. Call Auction Period:

    • No trading occurs; only order placement.
    • Funding Rate = 0

  2. Continuous Trading Period:

    • Premium Index (P) = 0
    • Interest Rate (I) calculated as in standard contracts
    • Data from call auction does not affect actual funding fees

This structure supports fair price discovery before official listing while minimizing speculative distortions.

Funding Rate Limits During Volatility

During sharp market moves, exchanges may adjust the funding rate cap to maintain order and discourage excessive speculation.

Under normal conditions:

Funding Rate Limit = ± Min((IMR − MMR) × 0.75, MMR)

Where:

However, if futures and spot prices diverge significantly, the multiplier (currently 0.75) can be increased up to 1.0 to strengthen alignment.

These dynamic limits help stabilize prices during high-volatility events such as macroeconomic news or flash crashes.

👉 Discover how top traders manage positions during volatile funding cycles

Frequently Asked Questions (FAQ)

Q: When is the funding fee paid or received?

A: Funding fees are exchanged every funding interval—typically every 8 hours—at precise UTC timestamps like 00:00, 08:00, and 16:00.

Q: Who pays whom in the funding process?

A: If the funding rate is positive, longs pay shorts. If negative, shorts pay longs. You only pay/receive if you hold a position at the exact funding time.

Q: Can I avoid paying funding fees?

A: Yes—by closing your position before the next funding timestamp. Alternatively, some traders flip sides just before settlement to receive instead of pay.

Q: Why does the funding rate change every minute?

A: Because it’s recalculated every minute using real-time data on interest rates and the premium index, reflecting evolving market sentiment and order book depth.

Q: What happens if I’m using leverage?

A: Leverage doesn’t change who pays or receives funding—it’s always based on position size and direction. However, high leverage increases sensitivity to price moves around funding time.

Q: Where can I view current funding rates?

A: Most exchanges display live funding rates on the derivatives trading page. Historical data, including past premium indices, is often available under contract details or market data sections.

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By understanding how funding rates are determined and influenced by market dynamics, traders can make better-informed decisions—avoiding unexpected costs and capitalizing on favorable conditions. Whether you're new to perpetual futures or refining your strategy, mastering this mechanism is key to long-term success in derivatives trading.