How Perpetual Futures Dominate Bitcoin and Ether Markets, as Seen in SpaceX's Record-Breaking IPO

The process of setting crypto prices is often misunderstood, with many believing it is determined by spot trading. However, perpetual futures, also known as perpetual swaps or 'perps,' have become the dominant force in the crypto market, accounting for approximately 93% of all crypto futures volume. These contracts are leverage-friendly, have no expiration date, and can be held indefinitely, with traders paying 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 US 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 market for SpaceX's record-breaking $75 billion initial public offering, where perpetual futures contracts accurately predicted the company's first-day trading price, outperforming traditional banking estimates. The success of these contracts in predicting the IPO price highlights the growing influence of the derivatives market in determining prices, not just in crypto but also in traditional markets. The funding rate, which is the cost of holding a perpetual contract, plays a crucial role in anchoring the contract price to the underlying asset and provides a live readout of market sentiment. While the funding rate is essential for maintaining the contract's price, it can also eat into a trader's profit and loss, making it a critical factor to consider when holding directional positions. The SpaceX example illustrates the power of perpetual futures in pricing demand, but also highlights their limitations in accounting for supply. As the derivatives market continues to grow in influence, it is essential to understand the role of perpetual futures in determining prices and their potential impact on traditional markets.