The Dominance of Perpetual Futures in Crypto Markets

The process of setting crypto prices has evolved beyond traditional spot trading, where buyers and sellers meet on an exchange. Perpetual futures, or 'perps,' have become the dominant force in crypto markets, accounting for roughly 93% of all crypto futures volume. These contracts never expire and offer leverage, making them popular among traders. Research has shown that perpetual swaps on unregulated venues are the strongest instruments for bitcoin price discovery, with regulated futures and spot exchanges reacting to, rather than leading, these moves. A study found that Binance's perpetual market is the primary source of price formation across the fragmented crypto landscape. 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, is a key factor in price discovery and is watched closely by traders. The use of perpetual futures to price private companies like SpaceX has also been explored, with traders using these contracts to bet on the company's valuation before its initial public offering. The accuracy of these contracts in predicting the company's stock price on its first day of trading highlights the influence of perpetual futures in price discovery. However, the limitations of perpetual futures in pricing supply have also been noted, as seen in the case of SpaceX's stock price drop after the release of locked-up insider shares.