Futures Funding Rates

Definition ∞ Futures Funding Rates are periodic payments exchanged between long and short position holders in perpetual futures contracts to keep the contract price anchored to the underlying spot asset price. A positive funding rate indicates that long positions pay shorts, suggesting a bullish market sentiment, while a negative rate implies shorts pay longs, indicating bearish sentiment. These rates adjust based on market demand and supply for leverage. They serve as a balancing mechanism.
Context ∞ Futures funding rates are a critical metric for gauging market sentiment and potential volatility in derivative markets. High positive rates often signal excessive leverage on the long side, potentially leading to liquidation cascades if prices drop. Conversely, sustained negative rates can suggest significant short pressure. Analysts closely monitor these rates for insights into market stability and possible price corrections.