I've seen many people talk $BTC, $ETH and $ALTS funding and its implications without fully understanding the concept. Here's a quick thread that explains what funding is, how it works and what it can tell you, along with a simple cheat sheet.

Funding is a mechanism used to keep the price of perpetual swap/futures close to the price of the underlying spot instrument. Funding is adjusted to encourage the closing of positions in order to rebalance perp price.

This works as an incentive to close your position, creating the necessary buy/sell pressure to bring price back to spot levels. Positive funding means longs pay funding to shorts, whereas negative funding means shorts pay longs.

Funding can serve as a sentiment indicator. High funding shows longs are the "crowded trade", whereas negative funding shows shorts are "crowded". In bull markets, demand often exceeds sell pressure for extended periods resulting in higher funding than the bear market usual.

In my opinion, applying the concept of "funding too high" to the current market condition therefore has a much lower accuracy than it did a year ago. Conditions have simply changed.

So, how do I use funding? I frequently ignore it, to be honest. Most of my trades are long-term so short-term funding fluctuations don't bother me much. I do like to check on funding when entering new positions.

In this case I look for negative funding at support, or declining funding while price rises.

Here's a cheat sheet showing how funding can be used in combination with price action. Rising funding is typically bad news, whereas dropping funding is typically bullish.

My favourite: entering a long with negative funding at HTF support. In this scenario many people are shorting support, which never tends to end well for them. Perfect long entry.

Keep in mind this thread is purely my opinion, not some agreed-upon thing. Don't trade off funding alone, it's just another tool that can be useful in your analysis.

Please hit like & share this thread if you learnt something. Thanks and have a great Sunday.