Funding rates, open interest and liquidations: how to read them together

Why derivatives data matters for spot traders too

Perpetual futures are among the most actively traded products in crypto. Perpetuals are futures contracts with no expiry date, settled in a stablecoin or in the coin itself, and they let traders take leveraged long or short exposure with a fraction of the position value posted as margin.

Because so much of the activity sits in leveraged positions, forced closures can move the spot price as well. A wave of liquidations on a derivatives exchange is executed as market orders, and arbitrage traders carry that pressure across to spot venues within seconds. That is why spot traders watch these numbers even if they never open a futures position.

The CFTC's customer advisory on virtual currency trading stresses that these markets can be extremely volatile and that leverage magnifies losses. The data below is a way to see where that leverage is sitting.

Funding rate: the cost of holding a perpetual

A perpetual future never settles, so nothing forces its price back to the spot price. Funding does that job. At fixed times, traders on one side pay traders on the other. On Binance, for example, when the funding rate is positive, longs pay shorts; when it is negative, shorts pay longs. The exchange states that it does not charge a fee on funding payments: the money moves between traders.

Binance's documentation describes the default schedule as every eight hours, at 00:00, 08:00 and 16:00 UTC, with shorter intervals possible during extreme volatility. The rate combines a fixed interest component (0.01% per eight-hour period on most of its contracts) with a premium index that measures how far the perpetual is trading above or below the index price. Other exchanges use similar but not identical formulas and schedules, so always check the venue you trade on.

The payment is position value × funding rate, and only positions open at the funding time pay or receive it. Our funding rates guide covers the mechanics in more depth.

• Illustrative example: a 10,000 USDT long position at +0.01% per eight hours pays 1 USDT per interval, 3 USDT a day and about 90 USDT over 30 days, 0.9% of the position value.
• If funding rose to +0.05% per interval and stayed there, the same position would pay 5 USDT per interval, 15 USDT a day and about 450 USDT over 30 days, 4.5% of the position value.

Persistently high positive funding describes a market where longs are paying heavily to keep their exposure, which usually means the perpetual has been trading at a premium. Deeply negative funding describes the opposite. Both describe positioning that has been one-sided; neither tells you when it will change.

Open interest: how much is still open

Open interest is the total number (or dollar value) of derivative contracts that are open at a moment in time. Every open contract has a long side and a short side, so open interest does not count buyers or sellers; it counts outstanding contracts. Volume measures how much traded during a period, while open interest measures how much is still on the books afterwards.

Open interest rises when a new buyer and a new seller open a contract together. It falls when a long and a short close against each other, or when positions are liquidated. If a new trader simply takes over an existing position from someone closing, open interest does not change. Our open interest guide walks through each case trade by trade.

Dollar open interest also moves with price: the same number of contracts is worth more when price rises. Comparing open interest measured in coins with open interest measured in dollars separates new positioning from simple price changes.

Reading price and open interest together

Chart readers often describe four combinations. They are descriptions of what changed, not forecasts, and the usual labels in brackets are interpretations that can be wrong.

• Price up, open interest up: new contracts are being opened as price rises (often read as new longs pressing the move, although every new contract also has a new short).
• Price up, open interest down: contracts are being closed as price rises (often read as shorts covering or being liquidated).
• Price down, open interest up: new contracts are being opened as price falls (often read as new shorts pressing the move).
• Price down, open interest down: contracts are being closed as price falls (often read as longs closing or being liquidated).

Adding funding sharpens the picture. Rising open interest with strongly positive funding describes a market where a lot of new exposure is long and paying to stay that way. Rising open interest with negative funding describes crowded shorts. Very high open interest relative to its own history, combined with extreme funding, is the condition analysts call a crowded trade: it is not a signal, but it describes a market where a sharp move could force many positions to close at once.

Liquidations: when positions are closed by force

A leveraged position is liquidated when its margin can no longer support it. Binance's liquidation rules, for example, say that liquidation happens when the mark price reaches the position's liquidation price, which is the point where the collateral (initial margin plus realized and unrealized profit and loss) falls below the maintenance margin. The CFTC's futures glossary defines maintenance margin as the amount that must be kept on deposit at all times.

Exchanges use a mark price, derived from index prices on several spot venues, rather than the last traded price, so that a single spike on one order book does not liquidate everyone. Even so, liquidations are executed quickly and often as market orders, which is why they cluster during fast moves.

For an isolated-margin long, a rough approximation that ignores fees and funding is: liquidation price ≈ entry × (1 − 1 ÷ leverage + maintenance margin rate). Exchanges publish their own exact formulas and tiered margin rates, so treat this only as a way to see the shape of the risk.

• Illustrative example, 0.5% maintenance margin rate: a long at 60,000 with 10x leverage has an approximate liquidation price of 60,000 × (1 − 0.1 + 0.005) = 54,300, 9.5% below entry.
• The same long at 20x has an approximate liquidation price of 60,000 × (1 − 0.05 + 0.005) = 57,300, only 4.5% below entry.

If you size positions from a stop-loss, the stop should sit well before the liquidation price, so that the exchange never closes the trade for you. Our leverage and liquidation guide and position sizing guide show how to keep it that way.

How a liquidation cascade looks in the data

When many leveraged positions share similar liquidation prices, a move into that zone can trigger a chain: the first liquidations are market orders that push price further, which reaches the next liquidation prices, and so on. On the charts this usually shows up as a long candle with a large wick, a spike in reported liquidation volume, and a sudden drop in open interest as positions disappear. Funding often swings back towards neutral afterwards because the crowded side has been cleared out.

Reported liquidation totals should be read as a lower bound and compared only within the same data source. Exchanges publish liquidation data in different ways, some feeds sample rather than list every order, and aggregators combine venues differently. A headline figure for liquidations across the market is an estimate, not an audited total.

A reading routine, step by step

• Check the price chart first: trend, key levels and how far price has moved recently.
• Look at open interest in coin terms over the same period: is new exposure being added or removed?
• Check funding on the main venues: is one side paying an unusually high rate, and for how long?
• Look at recent liquidation data: did the last big move come with forced closures, and on which side?
• Write a one-line description, for example: price rising, open interest rising, funding positive and rising. Then decide what, if anything, it changes in your existing plan, such as smaller size or no new leverage.

Common mistakes

• Treating extreme funding as a reversal signal. Funding can stay elevated for long periods while price keeps moving in the same direction.
• Reading open interest as buyers versus sellers. Every contract has both. Open interest measures how much is open, not who is right.
• Comparing numbers across exchanges. Funding formulas, intervals, contract sizes and liquidation reporting differ by venue.
• Ignoring funding as a cost. For positions held for days or weeks, funding can matter as much as trading fees.
• Using the liquidation price as a stop. By the time it is reached, the exchange decides the exit, not you.

Sources and further reading

• Binance: Introduction to Binance Futures funding rates
• Binance: Futures liquidation protocols
• CFTC: Futures glossary
• CFTC: Customer Advisory, Understand the Risks of Virtual Currency Trading