The prices of the spot market and futures are different. To ensure their convergence, the exchanges have to install a mechanism named: Funding Rate.
The Funding Rates are periodic and variable payments paid or received by traders depending on their open positions. The Funding Rates are calculated with the interest rate, fixed by the exchanges, and the premium (primes), variable depending on the gap between spot and futures market.
They are done in peer-to-peer and the two options are as follow:
• Positive Funding Rate: perpetual price(futures) > spot price, buyers pay the fees to sellers.
• Negative Funding Rate: perpetual price < spot price, sellers pay the fees to buyers.
Interpretation: #
The open interest decreases when buyers and sellers of contracts close more positions than they open, and vice versa.
Generally, a positive and high Funding Rate indicates that the top of the market is reached, whereas a negative Funding Rate is followed by a significant bullish phase.
It should be noted that this indicator has to be combined with other indicators, but it gives true signals regarding the psychology of the market.