The Dominance of Perpetual Futures in Crypto Markets and Beyond

The process of setting crypto prices is often misunderstood, with many believing it is determined by spot trading, where buyers and sellers meet on an exchange. However, the reality is that perpetual futures contracts, which are leverage-friendly and never expire, now account for roughly 93% of all crypto futures volume. These contracts, also known as perps, have become the primary source of price formation in the crypto market, with research suggesting that they lead spot prices, rather than the other way around. A study in the Journal of Financial Markets found that perpetual swaps on unregulated venues were the strongest instruments for bitcoin price discovery, with regulated futures and U.S. spot exchanges reacting to, rather than leading, these moves. The evidence is not conclusive, but the direction of the literature over the past few years has been toward the derivatives market as the place where the price is made. This phenomenon is not limited to the crypto market, as demonstrated by the recent SpaceX IPO, where perpetual futures contracts accurately predicted the company's stock price before it began trading. The use of perpetual futures contracts in this context highlights their ability to price demand, but also their limitations in accounting for supply. As the crypto market continues to evolve, it is essential to understand the role of perpetual futures contracts in shaping prices and their potential impact on other markets.