How Perpetual Futures Dominate Bitcoin and Ether Markets, and Their Surprising Role in SpaceX's IPO

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, for years, perpetual futures, also known as perpetual swaps or 'perps', have been the main drivers of price discovery in the bitcoin, ether, and broader crypto markets. These contracts are leverage-friendly, never expire, and have become incredibly popular, with daily perp volume often surpassing the spot market. A key difference between traditional futures contracts and perps is that perps do not have a settlement date, and their price is not forced to meet the spot price of the underlying asset. Instead, perps can be held indefinitely, with the buyer or seller paying a funding rate that varies daily. Research has shown that perps are the strongest instruments for bitcoin price discovery, with studies finding that perpetual swaps on unregulated venues lead the market, and regulated futures and U.S. spot exchanges react to these moves. The evidence is not conclusive, but the direction of the literature suggests that the derivatives market is where prices are made. 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 to the underlying price and provides a live readout of sentiment. Traders watch the funding rate closely, as it can provide valuable insights into market sentiment. The use of perps is not limited to crypto markets, as demonstrated by the recent IPO of SpaceX. For several weeks, traders were able to buy and sell exposure to the company through pre-IPO perpetual futures, which accurately predicted the company's valuation before its listing. The accuracy of these contracts was striking, with the perpetuals on Hyperliquid and Binance quoting the equivalent of roughly $170 a share, well above the $135 IPO price set by the underwriters. The stock eventually opened at $161, up 19% from the IPO price, and the perpetual market had read the demand more accurately than the banks that spent months building the offering price. However, the perpetual market is not perfect, and it has its limitations. It is excellent at pricing demand but blind to supply, which can lead to significant price movements when new information enters the market. The case of SpaceX's IPO highlights the importance of understanding the role of perps in price discovery and their limitations.