How Perpetual Futures Markets Influence Bitcoin and Ether Prices

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 driver of price discovery in the crypto market, accounting for around 93% of all crypto futures volume. Perps are leverage-friendly contracts that never expire and can be held indefinitely, with their price influenced by a funding rate that varies daily. Research has shown that perps 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 pre-IPO market for SpaceX, where perpetual futures contracts accurately predicted the company's valuation before its initial public offering. The perp market's ability to price demand, but not supply, is a key factor in its influence on crypto prices. As the crypto market continues to evolve, understanding the role of perps in price discovery is crucial for traders and investors.