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. However, perpetual futures, also known as perpetual swaps or 'perps', have become the primary drivers of price discovery in the crypto market, accounting for approximately 93% of all crypto futures volume. These contracts, which never expire, allow for leverage and are settled through 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 these moves rather than leading them. A study found that Binance's perpetual market is the primary source of price formation across the fragmented crypto landscape. While the evidence is not conclusive, the direction of the literature suggests that the derivatives market is where prices are made. The funding rate, which is used to keep the contract price anchored to the underlying asset, is also a live readout of market sentiment. Traders watch it closely, as it provides insight into the market's direction. The use of perpetual futures was also seen in the pricing of SpaceX's initial public offering, where traders on various exchanges were able to buy and sell exposure to the company through pre-IPO perpetual futures. The prices quoted by these contracts were surprisingly accurate, with the stock opening at a price close to the predicted value. This demonstrates the power of perpetual futures in pricing demand, but also highlights their limitations in accounting for supply. The derivatives market has shown its ability to discover prices, and its influence is expected to continue in the crypto market and beyond.