## What Is Funding? How It Works and How to Profit From It

### What Is Funding - Basic Definition

In the world of futures trading, **what is funding** is a question that any investor interested in participating in Futures needs to understand. Essentially, funding is a periodic payment mechanism between Long and Short parties to maintain the link between the futures contract price and the actual Spot market price.

Specifically, funding is expressed as a percentage (%) and reflects the price difference between the two markets. When the Futures price is higher than Spot, Long traders must pay Short traders — this is called a positive Funding Rate. Conversely, when the Futures price is lower than Spot, Short traders pay Long traders — this is a negative Funding Rate.

### Why Is Funding Important on the Exchange?

**What is funding** is not just a technical mechanism but a foundation for maintaining market stability. Without funding, traders could exploit the price gap between Futures and Spot to earn unjustified profits, distorting the market.

Funding plays roles in:

- **Balancing supply and demand:** When one side (Long or Short) becomes too dominant, funding increases to encourage the other side to participate, creating natural equilibrium.

- **Stabilizing prices:** By adjusting economic incentives, funding aligns the futures contract price closely with the actual market price, reducing sudden volatility.

- **Limiting manipulation:** Funding creates costs for parties wishing to maintain long-term positions, preventing "price attack" tactics to manipulate the market.

- **Increasing liquidity:** When funding is at a reasonable level, it attracts arbitrage traders, thereby enhancing market liquidity.

### How to Calculate Funding - From Formula to Practice

Understanding what funding is is just the first step; you need to know how it is calculated. The standard formula is:

**Funding Rate = Max(0, Min(Premium Index, Mark Price) – Fair Price) / Funding Interval**

Where:

- **Premium Index:** Reflects the deviation between the futures price and the Spot price. Calculated as (Futures Price - Spot Price) / Spot Price × 100.

- **Mark Price:** The current reference price of the contract, calculated from the moving average of recent trades. Mark Price determines daily settlement and is used to calculate P&L (profit/loss).

- **Fair Price:** The "fair" value of the contract if unaffected by funding, usually equal to the Mark Price.

- **Funding Interval:** The period over which funding is calculated, commonly every 8 hours depending on the exchange.

A simplified formula for the payment amount is:

**Funding Fee = Total Open Position Value × Funding Rate**

For example: You open a Long position on BTC worth $10,000, with a funding rate of 0.05%, you pay 10,000 × 0.05% = $5 every 8-hour cycle.

### Market Sentiment Through the Lens of Funding

Funding is not just a number; it reflects the market's psychology. When funding is high and positive, it indicates that Longs are overly optimistic, willing to pay to hold their positions. This often signals a market top, with increased risk of correction.

Conversely, negative or deeply negative funding suggests Shorts are dominant, indicating bearish sentiment. Sometimes, this presents an opportunity for traders willing to "welcome the dip" into the market.

### Risks When Interacting With Funding

Although funding has advantages, it also carries risks:

- **High trading costs:** When funding spikes (sometimes up to 0.1% - 0.2% per cycle), Long positions must pay significant amounts. Monthly, this can total 7-10% of the position value.

- **Psychological traps:** Large traders may intentionally place huge orders to manipulate the Premium Index, pushing funding higher, forcing the losing side to close positions and profiting from it.

- **Unexpected liquidations:** If funding remains high for a long time and you use low leverage, the accumulated funding costs can gradually erode your capital, eventually leading to liquidation.

- **Unpredictable volatility:** Funding can change rapidly, exerting pressure on traders trying to forecast profits.

### Money-Making Strategies From Funding

Savvy traders not only avoid costs but also actively profit from funding. The most common strategy is **Funding Arbitrage (Spot-Futures Price Discrepancy)**:

**Implementation:**
1. Buy the asset on the Spot market (for example, buy 1 BTC at $60,000)
2. Simultaneously open a Short Futures position with equal volume (Short 1 BTC Futures with the same volume)
3. Wait to receive funding fees from the Long side (because you are Short)

**Specific example:**
You have $100,000, split in half: $50,000 buy BTC on Spot, $50,000 Short BTC Futures. The average funding rate is 0.05%/8h. Daily, you receive:

50,000 × 0.05% × 3 (times/day) = $75/day = ~$2,250/month = ~$27,000/year

With $100,000 capital, the APR reaches 27%, a very attractive figure compared to traditional bank interest rates.

**Important notes when applying:**

- This strategy **only works when funding is positive**. If negative, you pay money instead.

- Funding is unstable and can spike or drop sharply based on market sentiment.

- Maker/taker fees and withdrawal fees between exchanges will "eat into" profits.

- Use low leverage (1-2x) to reduce liquidation risk.

( Risk Management Experience

To avoid "biting more than you can chew," follow these rules:

- **Understand the mechanism:** Know how each exchange calculates funding )Premium Index, Mark Price###, and the calculation frequency (modes of 1h, 4h, 8h).

- **Choose suitable assets:** Major coins like BTC, ETH tend to have more stable funding. Altcoins can be too volatile.

- **Continuously monitor the market:** When funding surges to 0.15% or higher, it’s a warning sign; consider closing or reducing positions.

- **Use stop-loss orders:** Even if it seems safe, leverage always carries risks. Set stop-loss at 5-10% to protect your capital.

- **Don’t be greedy:** If you find an asset with funding over 0.1%, don’t rush to invest all your capital. Gradually test and scale.

( Related Terms You Should Know

- **Premium Index:** Measures the high/low level of futures prices compared to Spot.

- **Perpetual Swap:** A futures contract without an expiration date, with continuous funding payments.

- **Mark Price:** The reference price used to calculate profit/loss and liquidation.

- **ADL )Auto-Deleveraging###:** When the exchange faces issues, the most profitable positions are closed first to protect those with losses.

- **Liquidation:** The exchange automatically sells your contract when margin is insufficient.

- **Funding Interval:** The cycle over which funding is calculated, commonly every 8 hours.

( Conclusion

**What is funding** is no longer an obscure question. It is the bridge between two markets, an indicator of market psychology, and an opportunity to generate additional revenue for those who understand the mechanism. However, remember that any strategy carries risks. Start small, learn gradually, and only increase your scale when truly confident. The market favors those who are well-prepared and patient.