The Dominance of Perpetual Futures in Crypto Markets and Beyond

The mechanism of setting crypto prices is often misunderstood, with many believing it is driven by spot trading. However, perpetual futures, also known as perps, have become the dominant force in the crypto market, accounting for approximately 93% of all crypto futures volume. These contracts, which can be held indefinitely, have no expiration date and are highly leveraged, allowing traders to speculate on price movements with significant liquidity. 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 funding rate, which is the cost of holding a perpetual contract, plays a crucial role in maintaining the contract's price close to the underlying asset's spot price and serves as a live readout of market sentiment. A notable example of the power of perpetual futures is the pricing of SpaceX's initial public offering, where traders on various exchanges, including Binance and Coinbase, were able to accurately predict the company's valuation using pre-IPO perpetual futures contracts. This instance highlights the ability of the derivatives market to discover prices more efficiently than traditional methods, a trend that is increasingly observed in crypto trading.