How Perpetual Futures Control Bitcoin and Ether Prices, as Seen in SpaceX's Record 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 driver of price discovery in the crypto market, accounting for roughly 93% of all crypto futures volume. These contracts, which never expire, allow traders to buy and sell with leverage, and their daily volume often surpasses that of the spot market. A study in the Journal of Financial Markets found that perpetual swaps on unregulated venues were 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, particularly perpetual futures, plays a significant role in determining crypto prices, with spot markets following. This phenomenon was recently demonstrated in the pricing of SpaceX's record $75 billion initial public offering, where perpetual futures contracts accurately predicted the company's stock price before its listing. The funding rate, which is the cost of holding a perpetual contract, serves as a tether that keeps the contract price anchored to the underlying asset and provides a live readout of market sentiment. While the derivatives market excels at pricing demand, it is blind to supply, which can lead to price discrepancies. The SpaceX example highlights the importance of understanding the role of perpetual futures in price discovery and their potential impact on the crypto market.