How is the funding rate calculated for Kraken perpetual contracts?

Understanding the Basics of Perpetual Contracts on Kraken

Perpetual contracts are a type of derivative product that allows traders to speculate on the price movement of an underlying asset without an expiration date. Unlike traditional futures, perpetual contracts remain open until manually closed. To keep the contract price aligned with the spot market, exchanges like Kraken use a mechanism called the funding rate. This rate ensures that long and short positions pay each other periodically, discouraging prolonged deviation between the perpetual contract price and the index price of the asset.

The funding rate is crucial because it prevents arbitrage opportunities and maintains market equilibrium. On Kraken, this rate is applied every 8 hours and is exchanged directly between long and short position holders—Kraken itself does not profit from this transfer. The funding rate can be positive or negative, indicating which side of the market pays the other.

Components of the Funding Rate Formula

The funding rate on Kraken is calculated using a combination of two elements: the interest rate component and the premium index component. The full formula is:

Funding Rate = Interest Rate + Premium Index

Each component plays a distinct role in balancing the market.

• The Interest Rate reflects the cost of holding a position and is typically tied to the difference in interest rates between the quote and base currencies. For most crypto perpetuals on Kraken, this value is set to 0.01% per day, which translates to approximately 0.0033% every 8 hours.
• The Premium Index accounts for the divergence between the perpetual contract price and the underlying spot index price. If the contract trades significantly above the spot price, the premium index rises, increasing the funding rate and incentivizing shorts. Conversely, if the contract trades below the spot price, the premium index drops, potentially making the funding rate negative and favoring longs.

The Premium Index (P) is calculated using the following formula:

P = (Max(0, Impact Bid Price – Index Price) – Max(0, Index Price – Impact Ask Price)) / Index Price

Where:

• Impact Bid Price is the average price at which a hypothetical buy order of a defined size would be filled.
• Impact Ask Price is the average price for a hypothetical sell order of the same size.
• Index Price is the volume-weighted average price across major spot exchanges.

This calculation ensures that the premium reflects actual market pressure, not just order book noise.

How Kraken Determines the Funding Rate Periodically

Kraken recalculates the funding rate every 8 hours, aligning with three settlement periods per day. The exact timestamps for these intervals are typically:

• 00:00 UTC
• 08:00 UTC
• 16:00 UTC

During each interval, the exchange collects data from the preceding period to compute the final funding rate. This includes:

• Gathering the average premium index over the 8-hour window.
• Applying the interest rate component.
• Capping the total funding rate to prevent extreme values. Kraken enforces a funding rate cap, typically set at 0.75% per period (equivalent to 2.25% daily), though this may vary slightly depending on the specific contract.

The capped rate protects traders from excessive payments during volatile market conditions. If the calculated rate exceeds the cap, it is adjusted downward (or upward in the case of negative rates). This mechanism ensures stability and fairness.

How Funding Payments Are Applied to Trader Accounts

When the funding period ends, Kraken automatically settles the funding payment between long and short position holders. The process is seamless and requires no action from the trader.

• If the funding rate is positive, long position holders pay short position holders.
• If the funding rate is negative, short position holders pay long position holders.

The amount paid is calculated as:

Payment = Position Value × Funding Rate

For example, a trader holding a $10,000 long position when the funding rate is 0.01% will pay $1 to short holders. This payment is deducted from the trader’s available balance or margin, depending on the account structure.

It is important to note that only open positions at the moment of settlement are charged or credited. Positions opened after the settlement timestamp are not affected until the next cycle. Similarly, positions closed before settlement do not incur funding costs.

Kraken displays the next estimated funding rate on its trading interface, allowing traders to anticipate upcoming payments. This estimate is based on real-time premium and index data but may change before final settlement.

Viewing and Monitoring Funding Rates on Kraken

Traders can access real-time funding rate information directly through the Kraken Futures platform. To locate this data:

• Navigate to the futures trading interface at futures.kraken.com.
• Select the desired perpetual contract (e.g., PI_XBTUSD for Bitcoin).
• Locate the funding rate section, usually displayed near the price chart.
• View both the current rate and the next estimated rate.

Additionally, Kraken provides a funding history tab where users can review past funding payments applied to their account. This includes:

• Timestamp of each funding event.
• Applicable rate.
• Amount paid or received.
• Direction (paid by longs or shorts).

API users can retrieve funding rate data programmatically using Kraken’s Futures API. The endpoint GET /api/v3/funding_rates returns historical and projected rates for all active contracts. Example request:

curl 'https://futures.kraken.com/derivatives/api/v3/funding_rates?symbol=PI_XBTUSD'

This returns a JSON response containing the rate, timestamp, and symbol.

Strategies Influenced by Funding Rates

Understanding the funding rate enables traders to refine their strategies. For instance:

• Traders may avoid opening large long positions during periods of high positive funding rates, as holding costs accumulate over time.
• Arbitrageurs can exploit discrepancies between perpetual and spot prices, especially when funding rates incentivize convergence.
• Short-term traders might time their entries and exits to avoid funding settlement windows, minimizing unnecessary costs.

Some traders even engage in funding rate arbitrage, simultaneously holding a long on a high-negative-funding perpetual and a short on a high-positive-funding one, capturing the rate differential.

However, such strategies require careful risk management, as price movements can quickly outweigh funding gains.

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Frequently Asked Questions

What happens if I close my position before the funding settlement?If you close your position before the settlement timestamp (00:00, 08:00, or 16:00 UTC), you will not be charged or credited for that funding period. Only traders with open positions at the exact settlement time are affected.

Can the funding rate be zero on Kraken?Yes, the funding rate can be zero. This occurs when the premium index is near zero and the interest rate component is offset by market conditions. It indicates balanced demand between long and short positions.

Where can I find the official list of funding rate caps for each contract?Kraken publishes contract specifications in the Futures Help Center. Navigate to the specific contract’s detail page to view its funding cap, settlement time, and interest rate parameters.

Do funding rates affect my margin balance?Yes. Funding payments are deducted from or added to your available balance, which impacts your margin. A large negative funding payment could reduce your margin level and increase liquidation risk if not managed.