The Dominance of Perpetual Futures in Bitcoin and Ether Markets

The process of setting crypto prices is often misunderstood, with many believing it is driven by spot trading, where buyers and sellers meet on an exchange. However, for years, perpetual futures, also known as perpetual swaps or 'perps,' have been the primary drivers of price discovery for bitcoin, ether, and the broader crypto market, accounting for around 93% of all crypto futures volume. Perpetual futures are leverage-friendly contracts that never expire and can be held indefinitely by 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. The funding rate, which is paid by the crowded side of the trade every few hours, acts as a tether that keeps the contract anchored and provides a live readout of sentiment. The use of perpetual futures to predict the IPO price of SpaceX, which was more accurate than the price set by underwriters, demonstrates the power of these contracts in price discovery. However, perpetual futures are blind to supply, which can lead to price discrepancies, as seen in the case of SpaceX's post-IPO price drop due to the release of locked-up insider shares.