Funding Rate and Open Interest: two key indicators of the futures market
Two indicators that help you understand how positions build up in the perpetual futures market and which side is more "crowded".
What is the funding rate?
Perpetual futures contracts have no expiry date. To keep the price close to the spot market, exchanges make longs and shorts pay each other at set intervals (usually every 8 hours). The rate of this payment is called the funding rate.
- Positive funding: long position holders pay the short side. Longs are more crowded.
- Negative funding: short position holders pay the long side. Shorts are more crowded.
What is open interest?
Open interest (OI) is the total size of all futures positions that have not been closed. When OI rises, new money and leverage are entering the market; when it falls, positions are being closed.
How to read them together
- Price rising, OI rising: new positions are joining the rally.
- Price falling, OI rising: new short positions may be opening.
- Price rising, OI falling: shorts may be closing (a short squeeze).
These indicators describe the state of the market; on their own they do not predict its direction. Always keep risk management in mind when you make a decision.
This material is for educational purposes only and is not investment advice.
