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

The process of setting crypto prices is often misunderstood, with many believing it occurs through spot trading, where buyers and sellers meet on an exchange. However, for years, perpetual futures, also known as perpetual swaps or 'perps,' have played a crucial role in determining prices for bitcoin, ether, and the broader crypto market. These contracts, which never expire, account for approximately 93% of all crypto futures volume, with daily volumes often surpassing the spot market. A key difference between traditional futures contracts and perps is the absence of a settlement date in the latter, allowing them to be held indefinitely by paying a funding rate that varies daily. Research has shown that derivatives markets, particularly perpetual swaps on unregulated venues, are the primary drivers of bitcoin price discovery. A study published in the Journal of Financial Markets found that perpetual swaps were the strongest instruments for bitcoin price discovery, with regulated futures and U.S. spot exchanges reacting to these moves rather than leading them. Other research has identified Binance's perpetual market as a key source of price formation in the crypto landscape. While the evidence is not conclusive, with some studies suggesting spot markets still lead at certain frequencies or during times of stress, the overall trend in recent literature points to the derivatives market as the primary location for price discovery. 'Historically, we have seen perps leading mostly during bear market price rallies,' said Julio Moreno, head of research at CryptoQuant. The funding rate, which is paid by the crowded side of the trade every few hours, serves as both an anchor for the contract price and a real-time indicator of market sentiment. Traders closely watch the funding rate, as it provides insight into the market's direction. The use of perpetual futures was recently demonstrated in the SpaceX initial public offering (IPO), where traders on platforms like Binance and Hyperliquid bought and sold exposure to the company through pre-IPO perpetual futures. These contracts, which tracked an implied valuation rather than a share price, accurately predicted the stock's opening price, with the perpetual market quoting the equivalent of roughly $170 a share the night before listing, well above the $135 IPO price set by underwriters. The next day, the stock opened at $161, up 19%, and reached an intraday high above $176. The accuracy of the perpetual market in predicting the opening price was striking, with the market dominated by leverage-seeking retail traders reading first-day demand more accurately than the banks that spent months building the offering price. However, the stock has since fallen more than 40% from its June peak, dropping to around $115, due to supply issues that the perpetual market could not have priced. The SpaceX example highlights the significance of the derivatives market in price discovery, with perps excellent at pricing demand but blind to supply. This phenomenon is worth remembering in the context of crypto trading, where rallies or flushes often start in the funding rate before reaching spot markets.