How Perpetual Futures Dominate Bitcoin and Ether Markets, and Their Surprising Role in the SpaceX IPO

The process of setting crypto prices is often misunderstood, with many believing it involves spot trading on exchanges. However, perpetual futures, also known as perpetual swaps or 'perps,' have become the dominant force in the crypto market, accounting for around 93% of all crypto futures volume. These contracts are leverage-friendly, never expire, and can be held indefinitely, making them highly influential in price discovery. Research has shown that derivatives markets, particularly perpetual swaps on unregulated venues, are the primary source of price formation for bitcoin. The evidence suggests that the derivatives market leads the spot market, with perpetual futures driving price rallies during bear markets. 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 and serves as a live readout of market sentiment. The recent SpaceX IPO provides a striking example of the accuracy of perpetual futures in pricing demand. Traders on various exchanges, including Binance and Hyperliquid, were buying and selling exposure to SpaceX through pre-IPO perpetual futures, which ultimately predicted the company's first-day trading price more accurately than traditional underwriters. This highlights the growing influence of derivatives markets in price discovery, not only in crypto but also in traditional markets. While perpetual futures are excellent at pricing demand, they are blind to supply, which can lead to significant price movements when supply constraints are lifted, as seen in the case of SpaceX's IPO.