Funding rates explained: how perpetual futures really cost you
Funding rates are the periodic payments that tether a perpetual future to spot. Here is how they work, how to annualize them, and why they decide whether a leveraged position is profitable.
A perpetual future never expires, so there is no settlement date to drag its price back to spot. The funding rate does that job instead: every funding interval (commonly every 8 hours), longs and shorts exchange a payment proportional to the gap between the perp's mark price and the spot index.
Why it exists
When the perp trades above spot, longs pay shorts — this discourages crowded longs and nudges the perp back toward spot. When it trades below, shorts pay longs.
Annualizing the rate
A funding rate is quoted per interval. With three 8-hour intervals per day:
APR ≈ interval_rate × 3 × 365
So a 0.01% interval rate is roughly 10.95% per year — a real, recurring carry cost on a leveraged position.
Model funding across the whole holding period before you trust a backtest.