How do you calculate funding rate?

At a high level, a funding rate is computed by assessing the average difference between a perpetual swap’s price and its underlying’s price during a specific interval of time . The amount you are entitled to pay or receive as a result is based on what this funding rate is, and the direction and size of your position.

Positive funding rates indicate that long position traders are dominant and are willing to pay funding to short traders . Positive funding rates imply that many traders are bullish. Negative funding rates indicate that short position traders are dominant and are willing to pay long traders.

Since perpetual futures contracts never settle, exchanges use Funding Rates to ensure that futures prices and index prices converge on a regular basis. Funding Rates are periodic payments made to or by traders who are long or short based on the difference between perpetual contract markets and spot prices .

Funding Rate Calculation Bybit calculates the Premium Index (P) and Interest Rate (I) every minute and then performs an N*-Hour Time-Weighted-Average-Price (TWAP) over the series of minute rates. The Funding Rate is next calculated with the N*-Hour Interest Rate Component and the N*-Hour Premium / Discount Component.