Why Is the Perpetual Swap Funding Rate Negative?
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I have noticed that the perpetual swap funding rate on BTC/USD sometimes goes below zero. I understand that funding payments flow between longs and shorts, but what exactly does a negative funding rate imply about market sentiment? How can a retail trader take advantage of negative funding without taking excessive risk? I would appreciate a detailed explanation with practical examples.
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A negative funding rate means that shorts are paying longs to hold positions, which generally indicates a bullish bias. Many traders are net long and willing to pay a premium to maintain their long exposure. Here is how to interpret and trade it:
Interpretation
When the rate is below zero for several consecutive funding intervals, it suggests strong long demand and crowded longs.
It can also indicate that the price may be due for a pullback once the crowding unwinds.
Strategy Example
If funding is −0.02% every 8 hours and you open a 1x long position with 0.1 BTC notional, you earn 0.00002 BTC (~1.8 USD at $90 000) every funding period.
To manage risk you can hedge spot exposure by shorting an equivalent amount of spot BTC or a stablecoin basket. This isolates the trade to pure funding carry.
Risk Controls
Set a stop-loss on your perp position if price moves against you by more than the funding you collect.
Consider reducing leverage when funding is extremely negative (for example lower to 0.2×) to avoid liquidations.
This approach allows you to profit from the funding payments while hedging directional risk.
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Think of it like lending a friend money when they really want to borrow from you. When the demand to go long is high, they will pay you interest. You can “lend” by opening a long in the perp market. If you do not want the market risk, you can hedge with a short spot position or use a delta-neutral derivatives strategy on an exchange that supports both perp and spot.
For example last week funding went negative for 12 hours while BTC rallied 5 percent. Many retail traders kept holding longs and paid up. If you had collected funding and held a small short spot hedge, you would have been flat on price but happily pocketed the funding difference.
