Funding: the crowd's mood
Lesson 27 of 39 in the course “Crypto”. Free, with animations and a quiz.
What funding is
A futures contract is a contract on a coin's price; you do not get the coin itself. A perpetual future, or perp, has no end date. A long is a bet that price rises. A short is a bet that it falls. To keep the perp price close to the coin price, longs and shorts pay each other. That payment is funding. It usually happens every few hours, often every 8 hours.
Who pays whom
Funding above zero: longs pay shorts. That happens when more people want to bet on a rise and the perp trades above the coin itself. Funding below zero: the opposite, shorts pay longs. If funding is high and still climbing, the crowd is overheated: too many people are betting on a rise, often with leverage. Sounds like strength, but it is closer to fragility.
How much that is in money
Funding is a percentage of the position. For example: a $1,000 position, funding +0.01% per 8 hours. The long pays $1,000 × 0.01% = $0.10 per period. That is three payments a day, so $0.30. Pocket change. But at +0.1% it becomes $1 per period and $3 a day. In short: calm funding is barely noticeable, high funding quietly eats your profit.
How to use it
Funding is a mood thermometer, like the fear and greed scale: 0 is fear, 100 is greed. Very high funding looks like greed: there are many leveraged longs, and a sharp drop can wipe them out through liquidations, meaning forced closing. It is a reason to be more careful about going long, not a signal to sell. Overheating can last a long time.
Check yourself
- Funding is above zero. Who pays?
Correct answer: Longs pay shorts. Positive funding: longs pay shorts. It works as a brake on a crowd leaning too hard toward a rise. - Funding is very high and rising. What does it hint at?
Correct answer: The crowd is overheated on longs. High funding means many leveraged longs. A sharp drop often flushes such a crowd, but nobody knows exactly when. - Funding is...
Correct answer: A gauge of crowd mood. Funding shows which way the crowd leans. It guarantees no reversal and has nothing to do with withdrawals.