The Dominance of Perpetual Futures in Crypto Markets: A Lesson from SpaceX

The process of setting crypto prices is often misunderstood, with many believing it involves 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 dominant force in the crypto market, accounting for roughly 93% of all crypto futures volume. These contracts, which never expire, allow for leverage and are settled through a funding rate that varies daily. Research has shown that perpetual swaps on unregulated venues are 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. This phenomenon was recently demonstrated in the pre-IPO trading of SpaceX, where perpetual futures contracts accurately predicted the company's initial public offering price. The use of perpetual futures in this context highlights their ability to price demand, but also their blindness to supply, as seen in the subsequent decline of SpaceX's stock price due to the release of locked-up insider shares. The influence of perpetual futures is a key aspect of crypto markets, and their dominance is likely to continue, with spot markets playing a secondary role in price discovery.