What if a perpetual swap price is above the spot price?

When the price of a perpetual swap is above the spot price of the underlying digital assets, then we say that the funding rate is positive. In this case, traders holding long positions would pay a small fee to those shorting the digital assets.

Do perpetual swaps have an expiry date?

Perpetual swaps do not have an expiry date, therefore they need another mechanism to keep the price of the contract as close to the index price as possible. This mechanism is called – the funding rate. Funding is a payment made from one side of the trade (long or short) to the other.

What is the funding rate?

The funding rate is how the price of a perpetual swap is kept close to the price of the underlying asset. It works by sending periodic payments between long and short traders. This is critical: a poorly designed funding rate makes perpetual swaps riskier, more volatile, and more costly.

What happens if BTC/USD perpetual swap is trading below the spot price?

On the other hand, if the BTC/USD perpetual swap is trading below the spot price of Bitcoin, the funding rate would be negative. This means that short traders would pay long traders (discouraging short positions and encouraging long positions, thus raising the perpetual swap’s price up towards the underlying).