Premium Index Explained: Why It Matters for Crypto Traders

In crypto trading, understanding market sentiment is important for making profitable decisions. One key metric that helps traders analyse the sentiment is the Premium Index. This index measures the difference between the spot price of an asset and its futures price, revealing whether traders are paying a premium (bullish sentiment) or a discount (bearish sentiment) for futures contracts.

What is the Premium Index?

Short answer: The difference between the spot price and contract price of an asset

The crypto market consists of different types of trading environments, including the spot market and derivatives market (such as perpetual contracts from Bybit, Phemex or Apex). The key difference is that in the spot market, you buy and own the actual asset, while in the derivatives market, you trade contracts that allow you to speculate on price movements using leverage, without owning the underlying asset. So the market participants in each market are different, in derivative markets, participants are taking more risk.

How to read the Premium Index

There are two key ways to analyse the Premium Index:

Positive vs. Negative Values: Indicates whether futures are trading at a premium (bullish sentiment) or a discount (bearish sentiment) compared to spot prices.
Extreme Movements: Identifies market conditions where the premium index reaches unusually high or low levels, signalling potential trend reversals or breakout opportunities.

Positive or Negative

In a way, it works slightly similar to funding rates. Whenever the premium index is negative (red), it means that the spot price of e.g. Bitcoin is higher than the price for perpetual contracts. This basically means that there is less speculation and risk-taking and healthier market conditions. Whenever the premium index becomes positive (perpetual contract price is higher than spot price), you see that the market has less potential to go higher due to a high amount of speculation. It is important to note that periods of negative or positive premium are important, not necessarily one moment.

Extreme readings

Another way to use the premium index is to look at the extremes. If you select the candlestick chart you will be able to see the shadow of the candles, this will show you where extreme readings have taken place. Basically, when you see an extreme reading it means that there has been a big divergence between the spot and perpetual contract price marking often a potential reversal in the charts. It’s important to note that it’s not a guaranteed reversal, but it’s increasing the likelihood of it.

Premium Index vs. Funding Rate: What’s the Difference?

Now that we’ve covered the Premium Index, let’s compare it to the Funding Rate, another key metric in futures trading.

The Premium Index shows whether futures prices are higher or lower than spot prices, helping traders spot bullish or bearish sentiment. The Funding Rate, on the other hand, is a fee paid between long and short traders to keep futures prices aligned with the spot market. These metrics can be combined by traders to get even more accurate market analysis.

If both the funding rate and premium index is negative, it shows that there is a bearish sentiment in the market which increases the likelihood for a bounce or bullish price action.

If both the funding rate and premium index is positive, it signals a bullish, optimistic sentiment, which can be a warning signal. If the majority feels overly bullish it can drive the price down.

Best Tool to View the Premium Index

You can use the Premium Index indicator for free on Whaleportal. You can create an account and use it in the free Whaleportal PRO charts too for the best experience. You can change the chart in the settings.

Common Questions About the Premium Index (FAQ)

Can the premium index predict price reversals?

Yes, if you use the candle chart and look at the shadow of the candle it can help predicting reversals.

How often should traders check the premium index?

That really depends on the traders strategy. The Premium index can give on a weekly basis a good view on what the sentiment in the market is.

Conclusion: How to Use the Premium Index in Your Trading

The Premium Index is a useful tool for understanding market conditions. When the premium is positive, futures prices are higher than spot prices, which can indicate excessive speculation. If it stays high for too long, the market may be overheated.

On the other hand, a negative premium means futures prices are lower than spot prices. This is usually a sign of a healthier market, as spot buyers are leading the trend rather than leveraged traders.

To use the Premium Index effectively:

Identify Extreme Values → These can signal potential market shifts.
Combine with Funding Rates → Helps you understand trader positioning more clearly.
Use with Open Interest & Liquidation Data → Provides a more complete view for better trade decisions.

By keeping an eye on the Premium Index, you can better understand market sentiment and avoid trading traps.

Here is a video explaining how to use the premium index for reversals on Bitcoin.