Cryptocurrency Markets Are Dominated by Perpetual Futures, and SpaceX's IPO Proved It

The process of setting cryptocurrency prices is often misunderstood, with many believing it is driven by spot trading, where buyers and sellers meet on an exchange. However, for years, perpetual futures contracts have played a significant role in determining the prices of major cryptocurrencies like bitcoin and ether. These contracts, also known as perpetual swaps or 'perps,' are leverage-friendly and never expire, accounting for roughly 93% of all crypto futures volume. A traditional futures contract has a settlement date, but perpetual futures can 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 the price is made, with spot markets following. The funding rate, which is paid by the crowded side of the trade every few hours, acts as a tether that keeps the contract anchored and provides a live readout of sentiment. Traders watch the funding rate closely, as it can indicate the market's direction. A recent experiment with SpaceX's IPO showed the predictive power of perpetual futures contracts. Traders on Binance, Coinbase, and other platforms were buying and selling exposure to the company through pre-IPO perpetual futures, which were quoting the equivalent of roughly $170 a share, well above the $135 IPO price set by underwriters. When SpaceX listed, the stock opened at $161, up 19%, and the perpetual market had accurately predicted the first-day demand. However, the stock has since fallen more than 40% from its peak, due to supply issues that the perpetual market could not have priced. The SpaceX example highlights the dominance of perpetual futures in price discovery and their limitations in pricing supply. As the cryptocurrency market continues to evolve, it is essential to understand the role of perpetual futures contracts in driving price discovery and their potential impact on the market.