How Does a Negative Funding Rate Reflect Market Sentiment?

A negative funding rate reflects a predominantly bearish market sentiment, meaning the majority of traders are short on the perpetual contract. This high demand for short positions drives the perpetual contract price below the spot price, creating a negative premium.

The negative funding rate then forces short traders to pay long traders, creating a financial incentive for traders to take long positions and push the contract price back up toward the spot price.