> For the complete documentation index, see [llms.txt](https://docs.coinkarma.co/llms.txt). Markdown versions of documentation pages are available by appending `.md` to page URLs; this page is available as [Markdown](https://docs.coinkarma.co/english/indicators-guide/oi-weighted-funding-rate.md).

# OI-Weighted Funding Rate

## What is OI-Weighted Funding Rate? (Open Interest-Weighted Funding Rate)

The following uses the BTC OI-Weighted Funding Rate as an example.

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Funding rates are a mechanism used by cryptocurrency exchanges to keep the price of perpetual contracts in balance with the price of the underlying asset. The funding rate is usually a constant (0.01%). When the premium rises to a certain level, the funding rate starts to increase; since this makes holding longs more expensive, it pushes longs to close their positions and brings the perpetual contract price back down. Conversely, if the perpetual contract trades too far below the spot price, the funding rate turns from positive to negative, which pushes shorts to close their positions and brings the perpetual contract price back to a normal level.

The funding rate is controlled by the interest rate and the premium, so the conditions under which the funding rate changes can be understood through the premium:

Premium Index (P) = \[Max(0, Impact Bid Price - Price Index) - Max(0, Price Index - Impact Ask Price)] / Price Index

The **OI-Weighted Funding Rate** is calculated by weighting the funding rates according to the open interest of BTC perpetual contracts on each major exchange.<br>

## How to Use OI-Weighted Funding Rate

When the futures market turns optimistic and leveraged long sentiment runs high, the premium of perpetual contracts over spot widens, and the funding rate rises with it.

So, just like **Future Basis Rolling APY**, the OI-Weighted Funding Rate can be used to gauge market sentiment.

### ● When the funding rate surges (meaning perpetual contracts are priced significantly above spot), possible scenarios include:

1\. Price is in an uptrend, and longs are aggressively opening positions with high leverage, pushing up the perpetual contract price.

2\. Price is in a downtrend, and longs are aggressively buying the dip and holding against the trend, keeping the perpetual contract price relatively high.

Either way, the situation is actually unfavorable for the bulls:

1\. It indicates optimistic market sentiment, with longs using higher leverage than shorts. It is more likely that retail traders are the ones going long, and they are more likely to get wiped out.

2\. It indicates that a sizable amount of long positions may soon face liquidation or stop-losses, giving shorts the advantage.

### ● When the funding rate drops (meaning perpetual contracts are priced significantly below spot), possible scenarios include:

1\. Price is in a downtrend, and shorts are aggressively opening positions with high leverage, pushing down the perpetual contract price.

2\. Price is in an uptrend, and shorts are aggressively shorting and holding against the trend, keeping the perpetual contract price relatively low.

Either way, the situation is actually unfavorable for the bears:

1\. It indicates pessimistic market sentiment, with shorts using higher leverage than longs. It is more likely that retail traders are the ones going short, and they are more likely to get wiped out.

2\. It indicates that a sizable amount of short positions may soon face liquidation or stop-losses, giving longs the advantage.<br>

## Conclusion: Limitations of the OI-Weighted Funding Rate

As with the Future Basis Rolling APY: before BTC spot ETFs were approved, it was relatively difficult for regulated funds to gain BTC exposure. Now it is very easy to buy ETFs and short futures, and the large number of traditional institutions entering this arbitrage dampens funding rate data. Therefore, when using the OI-Weighted Funding Rate to judge market sentiment today, the baseline needs to be shifted lower compared with previous cycles.

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#### **Disclaimer**

Thank you for using CoinKarma. The data provided is based on historical performance and cannot guarantee future market trends. The cryptocurrency market is highly volatile. Users must assess risks and bear responsibility for their decisions.
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