The Dominance of Perpetual Futures in Crypto Markets

The process of setting crypto prices is often misunderstood, with many believing it involves spot trading on exchanges. However, perpetual futures, also known as perpetual swaps or 'perps,' have become the dominant force in the crypto market, accounting for approximately 93% of all crypto futures volume. These contracts never expire and can be held indefinitely, allowing traders to bet on price movements without the constraints of a traditional futures contract. 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 phenomenon was recently demonstrated 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 in pricing private companies has significant implications for the financial industry, highlighting the growing influence of derivatives markets in price discovery.