Funding rates and the cost of carry

A perpetual future has no expiry, which raises an obvious question: if nothing forces convergence, what stops the contract drifting away from spot forever? The answer is funding — a periodic cash transfer between longs and shorts that makes divergence expensive.

Traders treat it as a footnote until it is not. On a carry-heavy position it is the difference between an edge and a slow bleed against a drawdown limit.

The mechanism

Every eight hours — 00:00, 08:00 and 16:00 UTC — each open position pays or receives:

funding payment = position notional × funding rate

The rate itself is built from two pieces: an interest component (small, usually fixed) and a premium component that measures how far the perpetual is trading from the index. When the perp is bid above spot, the premium is positive, longs pay, and the cost of being long grows until someone arbitrages the gap away. That is the tether.

Crucially, the payment is on notional, not on margin. A $500,000 position pays the same funding whether you posted $50,000 of margin or $5,000. Leverage does not reduce carry — it concentrates it against a smaller equity base.

Small numbers, annualised

An 0.01% funding rate looks like nothing. Three windows a day makes it 0.03% daily, and 365 days makes it about 10.95% a year — for holding a position, before any price movement at all.

The right-hand column is the useful one. A market paying 55% annualised to be long is telling you something about positioning that no indicator will tell you as directly.

What it costs inside a drawdown limit

Put it in evaluation terms. A $100,000 account holding $500,000 of long notional — 5x — through a 0.03% funding window pays $150. Three windows a day is $450, which is 0.45% of account equity per day, or 9% of a 5% daily loss budget consumed before the price has moved.

Hold that for a week and you have paid $3,150 — nearly a third of the 10% total drawdown allowance — to carry a position that may still be flat. Funding is netted into equity as it settles, so it counts against both limits exactly like a trading loss.

Funding as a signal, not a strategy

The classic way to monetise funding directly is the cash-and-carry basis trade: short the perpetual, buy the equivalent spot, collect funding while the delta nets to zero. It is a real trade and it needs two legs on two venues.

Propology is perpetuals-only, so that trade is not available here, and it is worth being explicit about it rather than implying an edge that the platform cannot express. What funding is good for on a directional book is information:

• Persistently elevated positive funding means longs are paying to stay long — leverage is crowded on one side, and the unwind tends to be violent rather than orderly.
• Funding that flips negative during a downtrend often marks capitulation in the perp rather than in spot, which is a different thing from a bottom.
• A rate that normalises while price holds is one of the healthier signs available: positioning cleared without the price giving it back.

None of those is a trade on its own. All of them are cheap context, published every eight hours, that most traders never look at.

Budget for it explicitly

If a position is intended to be held for days, add the expected funding to the loss side of the trade before you enter it. Three windows a day at the current rate, multiplied by the notional, multiplied by the days you expect to hold: that number is part of your stop distance whether you account for it or not.

Traders who pass evaluations tend to know their carry cost to the dollar. Traders who fail them tend to discover it in the equity curve.