The Dominance of Perpetual Futures in Crypto Markets and Beyond

The process of setting crypto prices is often misunderstood, with many believing it is driven by spot trading, where buyers and sellers meet on an exchange. However, the reality is that perpetual futures, also known as perpetual swaps or 'perps,' have become the primary drivers of price discovery for bitcoin, ether, and the broader crypto market. These contracts, which are leverage-friendly and never expire, account for approximately 93% of all crypto futures volume, with daily perp volume often surpassing the spot market. A key difference between traditional futures contracts and perps is the absence of a settlement date in the latter, allowing them to be held indefinitely by paying a funding rate that varies daily. Research has shown that perpetual swaps on unregulated venues are the strongest instruments for bitcoin price discovery, with regulated futures and U.S. spot exchanges reacting to, rather than leading, these moves. The evidence suggests that the derivatives market is where prices are made, with spot markets following. This phenomenon is not limited to crypto, as seen in the case of SpaceX's record $75 billion initial public offering, where perpetual futures contracts accurately priced the company's valuation before its listing. The accuracy of these contracts in predicting the stock's performance highlights the importance of the derivatives market in price discovery. However, it is essential to note that perps are excellent at pricing demand but blind to supply, which can lead to discrepancies in pricing. The influence of perps is a significant factor in understanding market dynamics, and their role in shaping prices will continue to be a subject of interest in the world of finance.