What is a perpetual future, and what is a funding rate?
A perpetual future never expires, so what keeps its price tied to the real market? A funding rate. Here is how the mechanism works.
Every traditional futures contract has an expiry date, the point where it settles against the real asset and the contract stops existing. A perpetual future has no such date. It can be held indefinitely. So what stops its price drifting away from the actual market it is supposed to track? A mechanism built specifically to answer that question: the funding rate.
What is a perpetual future?
A perpetual future — a "perp" — is a derivative contract whose price is designed to track an underlying asset, most commonly a cryptocurrency's spot price, with no expiry and no settlement date. You are not buying or holding the asset itself; you are holding a contract whose value is meant to move in step with it. Because there is no expiry to force the contract's price back in line with spot the way a traditional future's settlement date does, perpetuals need a different, ongoing mechanism to keep the two prices from drifting apart. That mechanism is the funding rate.
What is a funding rate?
A funding rate is a periodic payment exchanged directly between the traders holding long positions and the traders holding short positions on a perpetual contract, typically every few hours. Crucially, this payment does not go to the exchange; it moves from one side of the trade to the other. When the perpetual's price sits above the underlying spot price, longs pay shorts. When it sits below spot, shorts pay longs.
Why does that keep the price in line?
It creates a direct financial incentive to correct the gap. If the perpetual trades above spot, paying to hold a long position becomes less attractive, and receiving a payment for holding a short becomes more attractive, drawing more selling pressure into the contract until its price is pulled back towards spot. The reverse happens when the perpetual trades below spot. The funding rate is the ongoing correction a settlement date would otherwise provide, running continuously instead of on a fixed schedule.
What a funding rate is not
It is not a trading fee charged by the exchange, and it is not a prize for guessing which way the market will move. It is a transfer between two sides of the same contract, sized by how far the contract has drifted from spot at that moment. A positive or negative funding rate describes the current relationship between a specific perpetual contract's price and the spot price behind it. It does not forecast where either price goes next, and this article makes no claim that it does.
Why this article stops here
Perpetual futures are commonly traded on margin, meaning a trader controls a position larger than the funds they have put up. A position that moves far enough against such a trader can be liquidated, closed out by the exchange, often at a real loss. That is a genuinely different risk profile from holding the underlying asset outright, and it deserves a serious, dedicated look on its own rather than a rushed paragraph at the end of a mechanics explainer. This piece exists to explain what a perpetual future and a funding rate actually are, not to walk through if, when or how to trade on margin — Northtape never advises on that, here or anywhere.
FAQs
Does a positive funding rate mean the price is about to fall? No. It describes where the perpetual's price currently sits relative to spot at this moment, not a prediction of what happens next. Treat it as a snapshot of the contract's current state, not a forecast.
Who actually receives a funding payment? Traders on the opposite side of the contract from wherever the imbalance sits, not the exchange. The exchange facilitates the transfer; it does not keep the payment.
Is a perpetual future the same thing as owning the underlying coin? No. You hold a contract that tracks the asset's price; you do not hold the asset itself, and the two carry different risks, including the funding mechanism and, where margin is involved, liquidation.
Does Northtape let me trade perpetual futures? No. Northtape tracks news and spot-market prices; it does not offer derivatives trading, and nothing here is a suggestion that you should seek it out.
None of this is investment advice. Perpetual futures and the margin commonly used alongside them carry real risk of loss, including full loss of the funds committed to the position, and this article describes how the mechanism works rather than whether or how to use it.