The Dominance of Perpetual Futures in Crypto Markets

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 contracts, also known as perpetual swaps or 'perps,' have played a significant role in determining crypto prices, accounting for around 93% of all crypto futures volume. These contracts are leverage-friendly, have no expiration date, and can be held indefinitely, with traders 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 US 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 was evident in the case of SpaceX, where perpetual futures contracts accurately predicted the company's IPO price, outperforming traditional Wall Street predictions. The use of perpetual futures contracts in pricing SpaceX's IPO highlights their effectiveness in pricing demand, but also their limitations in accounting for supply. As the crypto market continues to evolve, the dominance of perpetual futures contracts in driving price discovery is likely to persist.