How Does a Negative Funding Rate Affect the Behavior of Long and Short Traders?
A negative funding rate means that the perpetual contract is trading at a discount to the spot price. This causes short position holders to pay long position holders.
This payment incentivizes traders to open long positions and close short positions, creating upward pressure on the contract price, thereby pushing it back toward the spot price.
Glossar
Funding Rate
Cost ⎊ The Funding Rate is the periodic payment exchanged between long and short positions in perpetual futures contracts, designed to anchor the contract price to the underlying spot index price.
Negative Funding
Phenomenon ⎊ Negative funding is a market phenomenon specific to cryptocurrency perpetual futures contracts, occurring when the contract's price trades below the underlying spot index price, a condition known as backwardation.
Negative Funding Rate
Condition ⎊ Negative Funding Rate occurs in perpetual swap contracts when the annualized rate paid by short position holders to long position holders becomes negative, signaling that the market is predominantly net short.
Long and Short
Position ⎊ Long and short represent the two primary directional positions in financial markets.