The Dominance of Perpetual Futures in Crypto Markets and Beyond

The process of setting crypto prices is often misunderstood, with many believing it involves spot trading on exchanges. However, the reality is that perpetual futures, also known as perps, have become the primary drivers of price discovery in the crypto market. These contracts, which never expire, account for approximately 93% of all crypto futures volume and often have a larger daily volume than the underlying spot market. Research has shown that perps are the first to reflect new information in the market, with spot exchanges and regulated futures markets reacting to their movements. The funding rate, which is the cost of holding a perp position, plays a crucial role in keeping the contract price anchored to the underlying asset and serves as a sentiment indicator for traders. A recent example of the power of perps can be seen in the SpaceX IPO, where traders on crypto exchanges were able to accurately price the company's valuation before its listing, outperforming traditional Wall Street banks. This highlights the growing influence of derivatives markets in price discovery, not just in crypto but also in traditional assets.