What the funding rate really is
• A perpetual future has no expiry, so the futures price can drift away from the spot price
• The funding rate is the counterweight that keeps the two together — the overheated side pays the other side a fee, cooling the lopsidedness
So it becomes a signal
• A strongly positive funding rate means longs are crowded; a strongly negative one means shorts are crowded
• When one-sidedness is extreme, fuel builds for a 'squeeze' in which that side is liquidated and price jumps the other way
• The mark price is an average across several exchanges that is used to compute liquidation, so that a momentary swing on one exchange does not cause an unfair liquidation
Where people slip
• They see the funding rate only as a simple fee and do not read 'where the crowd has piled'
The funding rate is not a cost but a thermometer of crowd lopsidedness. When it is extreme, the opposite side deserves caution.
Do you see the funding rate as a fee, or as a signal of which side the crowd has piled onto?