Funding Rate, Open Interest and Long/Short Ratio: Reading Futures Crowding

Perpetual futures and the funding rate

A perpetual future is a futures contract with no expiry. A dated future converges on the spot price at expiry, but a perpetual has no such day, so it needs a separate mechanism to keep its price close to spot. That mechanism is the funding rate. When the future trades above spot (the index price), the funding rate moves toward positive; when it trades below, toward negative. When it is positive longs pay shorts, and when it is negative shorts pay longs. It is not a fee the exchange collects but money that passes between traders, and it changes hands only if you hold a position at the settlement time.

How Binance sets the funding rate

On Binance USDⓈ-M perpetual futures, large coins such as Bitcoin and Ethereum settle every 8 hours (at 00:00, 08:00 and 16:00 UTC), many coins settle every 4 hours, and some settle every hour. On the 8-hour cycle, the funding rate is the premium (how far above the index the future traded) plus "interest − premium" clamped to within ±0.05%, and the interest component defaults to 0.01% per 8 hours. So whenever the premium is between −0.04% and +0.06%, the funding rate comes out at exactly 0.01%, which is why that value shows up so often on charts. The amount paid or received is the position value (mark price × quantity) × the funding rate.

• 10,000 USDT long, funding +0.01%: pays 1 USDT per settlement
• Same position, funding −0.05%: receives 5 USDT
• A 4-hour cycle means 6 settlements a day (3 on an 8-hour cycle)

How to read a funding rate chart

Because the funding rate reflects how far above spot the future traded, a strongly positive rate is read as longs buying more aggressively, bidding the price up as they go. A pattern that persists over several settlements says more than a single spike. Coins on different cycles have to be converted to an 8-hour basis before you compare them. This site's Funding Rate Dashboard labels an 8-hour-equivalent rate of +0.05% or more "Longs crowded" and −0.05% or less "Shorts dominant", but these are only names for ranges, not forecasts of price direction. Also keep in mind that the values in the table are estimates that keep changing until just before settlement.

Open interest: how many contracts are open

Open interest (OI) is the total number of contracts that have not yet been closed. In futures, every long contract has a short contract on the other side, so OI rises when both sides of a trade are opening new positions, falls when both sides are closing existing ones (liquidations included), and stays the same when one side is entering and the other is leaving. Viewed alongside price, it therefore lets you gauge whether a move came from new positions or from existing positions exiting. When price and OI both drop sharply, as in the plunge in the figure, it is commonly read as a wave of long closures and liquidations. OI measured in USDT rises just because price rises, so measuring it in number of coins is more accurate.

Four combinations of price and OI

Pairing the direction of price with the direction of OI gives four combinations. The usual interpretations are listed below, but all of them are guesses. Every contract has both a long and a short, so rising OI means new longs and new shorts were created in equal amounts. Saying "new longs came in" is an inference, drawn from the direction of price, about which side entered more urgently at market. Keep in mind too that this is data from one exchange for one coin.

• Price ↑ OI ↑: read as a rise led by new longs coming in
• Price ↑ OI ↓: a rise led by shorts closing out (short covering)
• Price ↓ OI ↑: a drop led by new shorts coming in
• Price ↓ OI ↓: a drop led by longs closing out and being liquidated

There are three long/short ratios

Across the whole futures market, long and short contracts are always equal in number, so a long/short ratio measures something other than contract count. Binance publishes three ratios, and each looks at something different. The all-accounts ratio is closer to a headcount of which way people lean, while the top-trader position ratio is closer to where the money sits. The two sometimes move in opposite directions, and there is no rule for which one is right. A ratio of 1.5 means 60% long and 40% short (long share = ratio ÷ (1 + ratio)).

• All accounts: accounts holding longs ÷ accounts holding shorts
• Top trader accounts: long accounts ÷ short accounts within the top 20% by margin
• Top trader positions: long position size ÷ short position size within the top 20%

The taker buy/sell ratio

Every trade has a side that posted an order and waited (the maker) and a side that took that order right away (the taker). The taker buy/sell ratio is the volume bought at market divided by the volume sold at market, and a value above 1 means buyers were the more urgent side during that period. The filled volume itself is always equal on the buy and sell sides, so this ratio shows not who bought more, but which side filled immediately instead of waiting in the order book. On short bars it can swing widely on just a few large orders.

Crowding measures the size of the risk, not the direction

If the funding rate is strongly positive, OI is rising and the long ratio is high as well, you can read it as leverage building up on the long side. If price then moves sharply the other way, the chain reaction of liquidations triggering further liquidations can grow larger. But these numbers do not tell you when the crowding will unwind, or how much further price will go before it does. It is more accurate to treat crowding as information about how large a move could become if a sudden shift comes, rather than about the next direction. You can watch actual liquidations cluster on the Liquidation Radar.

Limits of the data

Binance publishes open interest, long/short ratio and taker ratio statistics for only the most recent 30 days. That makes it hard to compare with months or years ago, or to test anything over a long period. They are also figures from a single exchange, so moves on other exchanges and in the spot market are not captured. The mechanics of leverage and liquidation are covered separately in the coin topic's article "What happens when you trade with borrowed money", and how to take in the various market indicators in "What market indicators actually tell you".