The Dominance of Perpetual Futures in Crypto Markets and Beyond

The process of setting crypto prices is often misunderstood, with many believing it to be the result of spot trading. However, perpetual futures, which are leverage-friendly contracts that never expire, have become the primary drivers of price discovery for bitcoin, ether, and the broader crypto market. These contracts, also known as perpetual swaps or 'perps,' account for approximately 93% of all crypto futures volume, with daily volumes often surpassing those of the underlying spot market. Unlike traditional futures contracts, which have a settlement date and are forced to meet the spot price of the underlying asset, perpetual futures can be held indefinitely, with the buyer and seller exchanging a funding rate that varies daily. Research has consistently 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 increasingly where prices are made, with spot markets following. This phenomenon is not limited to crypto, as demonstrated by the pre-IPO perpetual futures market for SpaceX, which accurately priced the company's valuation before its public listing. The perpetual market's ability to price demand, but not supply, is a key factor in its influence on price discovery. As seen in the case of SpaceX, the derivatives market can provide a more accurate reflection of market sentiment than traditional spot markets, highlighting the significant role of perpetual futures in shaping market prices.