Perpetual Futures Dominate Bitcoin and Ether Markets, Demonstrating Their Influence

The process of setting crypto prices is often misunderstood, with many believing it to be driven by spot trading, where buyers and sellers meet on an exchange. However, the reality is that 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. These contracts, which never expire, allow traders to bet on the price of an asset without actually owning it, and their influence can be seen in the way they drive market trends. 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 suggests that the derivatives market is where prices are made, with spot markets following. The funding rate, which is the cost of holding a perpetual contract, plays a crucial role in keeping the contract price anchored to the underlying asset price, and is closely watched by traders as a sentiment indicator. The recent SpaceX IPO provides a notable example of the influence of perpetual futures, where traders using these contracts were able to accurately predict the stock's price before it listed, demonstrating the power of the derivatives market in driving price discovery. This phenomenon is not limited to the crypto market, as seen in the SpaceX example, where perpetual futures contracts were used to bet on the company's valuation before its IPO, and were able to accurately predict the stock's price. The use of perpetual futures in this way highlights their ability to drive price discovery, even in markets where traditional spot trading is not present. The fact that these contracts are blind to supply, and only price demand, is an important consideration, as seen in the subsequent drop in the SpaceX stock price, which was driven by supply-side factors that the perpetual futures market could not have predicted.