What Is the Impact of High Volatility on the Funding Rate Mechanism?

High volatility in the cryptocurrency market tends to amplify the difference between the perpetual contract price and the spot price. This divergence leads to a higher (more positive or more negative) funding rate.

A higher funding rate increases the cost for the side of the trade that is driving the price away from the spot (e.g. longs pay more when the contract is at a premium), which in turn creates a stronger incentive for arbitrageurs to bring the contract price back into alignment with the spot price.