Perpetual Futures Dominate Bitcoin and Ether Markets, as Evidenced by SpaceX's IPO

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, perpetual futures, also known as perpetual swaps or 'perps,' have become the primary drivers of price discovery in the crypto market, accounting for approximately 93% of all crypto futures volume. These contracts, which can be held indefinitely, allow traders to leverage their positions and have been shown to lead price movements in the market. Research has consistently pointed to derivatives, particularly perpetual swaps on unregulated venues, as the strongest instruments for bitcoin price discovery. The evidence suggests that the derivatives market is where prices are made, with spot markets reacting to moves initiated in the derivatives space. This phenomenon was recently illustrated by the pre-IPO trading of SpaceX, where perpetual futures contracts accurately predicted the company's first-day trading price, outperforming traditional estimates. The derivatives market's ability to price demand, but not supply, is a key factor in its influence on crypto prices. As the crypto market continues to evolve, the role of perpetual futures in shaping prices will likely remain significant.