Perpetuals & Funding Rates Explained
Most crypto leverage these days does not trade through the dated futures you might know from commodities. It trades through the perpetual swap — a futures contract with no expiry date, first launched by BitMEX in 2016 and now carrying the large majority of all crypto-futures volume. Because it never settles, something has to stop its price from drifting away from the underlying coin. That something is the funding rate, and if you trade perps without understanding it you will pay a tax you never saw coming.
What a perpetual actually is
A normal futures contract expires on a set date, and on that date its price is forced to meet the spot price. A perpetual has no such date, so there is no natural anchor. Exchanges bolt one on artificially.
- A perpetual swap lets you hold a leveraged long or short position indefinitely, as long as you keep enough margin.
- The mark price tracks the underlying spot market; your profit and loss is measured against it.
- Leverage means you control a position far larger than your deposit. At 10x, a 10% move against you wipes out your entire margin. Crypto perps routinely offer 20x, 50x, even 100x — and at those settings a tiny adverse move is a total loss.
That last point is not a detail. Liquidation — the exchange force-closing your position when your margin runs out — is the defining risk of leveraged crypto. It happens automatically, often within seconds, and you cannot appeal it. Treat any leverage above a few times as a way to lose your whole stake quickly.
Leverage does not make a bad trade good. It makes every trade — good or bad — faster and louder. The liquidation engine has no mercy and no off switch.
The funding rate: the toll that keeps price honest
The funding rate is a small periodic payment, usually settled every eight hours, that flows directly between traders — not to the exchange. Its job is to pull the perpetual price back toward spot.
- When the perp trades above spot (more eager longs than shorts), funding is positive: longs pay shorts. Holding a long now costs you money each funding window.
- When the perp trades below spot (more eager shorts), funding is negative: shorts pay longs.
The mechanism is self-correcting. If everyone piles into longs, funding climbs, longs get taxed for holding, and the cost eventually nudges price back down toward spot. Research on real perpetuals finds funding does this job tightly — perpetual prices tend to stay within a few percent of spot even through crashes, far closer than equivalent dated futures.
The catch for a directional trader: in an excited bull market, positive funding can run at hundreds of basis points annualised. (A basis point is one hundredth of a percent.) If you are long and right about direction but funding is bleeding you every eight hours, your net result can be far worse than the price move alone suggests. Funding is a real, recurring cost — not a rounding error.
Why this matters for your journal
Funding payments are easy to forget because they trickle out in small amounts, separate from your entry and exit. But they are part of your true profit and loss. A perp position held for a week through high positive funding might show a clean price gain and still be a net loser once the toll is counted.
The discipline is the same one that runs the rest of your trading: measure the trade in R-multiples — the result expressed as a multiple of the risk you took — so leverage and funding both show up honestly. A trade that looks like +2R on price alone is not +2R if funding quietly ate half of it.
Put it to work in FSP: connect your crypto exchange — for Bitvavo, that is an API key and secret — so your fills sync into the journal, then log funding costs as part of each perp trade's outcome. Reviewing your real, funding-inclusive R-multiples in Analytics is the only way to know whether your perp trading actually makes money or just feels like it does.