In perpetuals, price can look “fine” on candles while derivatives are already overheated: the perp drifts away from spot, holding costs rise, and moves become jumpy. Arguing direction misses the point. The operational question is: what regime are we in, and what does it cost to carry risk?

Two metrics answer that cleanly:

• Premium Index shows the perp-vs-spot dislocation right now.
• Funding Rate shows the scheduled cost of carrying that dislocation (who pays whom to hold positions).

Read together, they act like a regime compass: Premium often flags pressure first, and funding monetizes it—changing how the market behaves.

The mechanics in one pass, without drowning in formulas

On Bybit, Premium Index (P) is defined using impact prices versus index price, and funding rate is built on Premium Index with clamp limits plus an interest component.

On Binance Futures, the logic is similar: funding depends on Premium Index plus an interest component with clamp limits, and in 2025 Binance documented formula updates that account for different funding settlement intervals.

The takeaway: Premium reflects the dislocation; funding is the payment mechanism that pushes the perp back toward spot over time.

What Premium Index tells you—and why it often moves first

Premium Index is a dislocation signal. When the perp trades well above spot, Premium rises; when it trades below, Premium falls. That helps you see derivatives pressure before it becomes obvious on a calm-looking chart.

Practical read:

• Premium rising → perp above spot → long-side overheating / derivatives pressure.
• Premium falling → perp below spot → short-side overheating / pressure the other way.

What funding tells you—and why it matters as a regime indicator

Funding is not an exchange fee. It is a transfer between market participants that turns dislocation into money. It makes carrying risk more expensive for one side and compensates the other.

Old rule still holds: extreme funding is a tax on stubborn positioning. It can be tradable for advanced setups, but for beginners it’s usually a regime warning: worse execution, sharper reactions, higher error cost.

Why hourly funding is a separate red flag

The worst case is when funding gets charged more frequently than usual. Bybit has introduced a dynamic settlement frequency system where funding settlement frequency can shift to a more frequent mode (including hourly) under defined conditions.

Operational takeaway: if settlement turns frequent, carrying a position can become a steady drain, and entries without margin buffer tend to degrade fast.

Reading Premium + Funding together: four workable regimes

Regime 1: Premium high, funding rising

Dislocation is building and longs are starting to pay up. Not a “short signal”—a risk tightening signal: smaller size, more pauses, fewer fresh entries.

Regime 2: Premium high, funding already extreme

Often a crowded one-way market. Price can continue, but risk becomes asymmetric: one liquidity sweep can snap the market back hard.

Regime 3: Premium easing, funding still high

Classic regime shift: dislocation starts to unwind while funding still reflects earlier pressure. This is usually where the tape gets choppy—avoid speeding up.

Regime 4: Premium near zero, funding moderate

The healthiest environment for systematic trading: fewer dislocations, fewer execution surprises.

An Overheating Playbook: What to Do When the Metrics Say “Too Hot”

• Reduce risk size on new trades; don’t add exposure “because it’s moving.”
• Use pauses after violent spikes, especially ahead of settlement timestamps.
• Don’t average into a regime where carry cost is already expensive.
• Check settlement frequency: a shift to a more frequent schedule is a separate reason to slow down.

How We Cover This Instrumentally

In our crypto screeners, Premium Index is charted and recalculated in real time, and filters account for funding and its regime. The objective is simple: don’t trade an overheated regime as if it were a normal market.

FAQ

Why can funding be positive or negative?

Because it reflects dislocation: when the perp stays above spot, carrying longs typically becomes paid; when below, the opposite can happen.

Are Premium Index and funding the same thing?

No. Premium shows the dislocation in the moment; funding is the scheduled payment mechanism built on that dislocation.

Can you just trade against extreme funding?

You can, but it’s not a button. Extreme funding is a regime warning where execution and risk can be worse—without a rule set it often becomes a mistake chain.

Why can Premium drop while funding stays high?

Funding is computed over intervals and can lag the real-time dislocation. Exchange formulas and clamps make the dynamics non-synchronous.

Why is hourly funding a red flag?

Because carry cost hits more frequently, and that typically coincides with elevated operational risk.

Conclusion

Premium Index tells you how far derivatives have drifted from spot, and funding tells you what it costs to carry that drift. Together they form a practical compass: when the market overheats, the edge is not predicting direction—it’s reducing risk early, taking pauses, and avoiding toxic regimes.