How Perpetual Futures Dominate Bitcoin and Ether Markets

The process of setting crypto prices is often misunderstood, with many believing it is determined by spot trading, where buyers and sellers meet on an exchange. However, for years, perpetual futures, also known as perpetual swaps or 'perps,' have played a significant role in bitcoin, ether, and the broader crypto markets. These contracts, which never expire, account for roughly 93% of all crypto futures volume, with daily perp volume often exceeding the spot market. Perpetual futures allow traders to hold positions indefinitely by paying a funding rate, which varies daily. Studies have shown that perpetual swaps on unregulated venues are the strongest instruments for bitcoin price discovery, with regulated futures and U.S. spot exchanges reacting to these moves. The evidence suggests that the derivatives market is where the price is made, with spot trading following. This phenomenon was recently demonstrated with SpaceX's record $75 billion initial public offering, where pre-IPO perpetual futures contracts accurately predicted the stock's first-day price, outperforming traditional Wall Street predictions. The perpetual market's ability to price demand, but not supply, is a key factor in its influence on crypto prices.