How Perpetual Futures Dominate Bitcoin and Ether Markets, and the Surprising Case of SpaceX

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 and the last trade sets the price. However, this has not been the case for years, particularly for bitcoin and ether. Perpetual futures, also known as perpetual swaps or 'perps,' have become the dominant force in the market, accounting for around 93% of all crypto futures volume. These contracts are leverage-friendly, 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. This phenomenon is not limited to cryptocurrency, as seen in the case of SpaceX's initial public offering (IPO). Traders on various exchanges, including Binance and Coinbase, were buying and selling exposure to SpaceX through pre-IPO perpetual futures contracts before the company's stock began trading on the Nasdaq. These contracts were structured to track an implied valuation rather than a share price. Notably, the perpetual market accurately predicted the first-day demand for SpaceX's stock, with the contracts pricing the company's valuation well above the IPO price set by underwriters. The stock's performance on its first day of trading closely followed the predictions made by the perpetual market. However, the subsequent decline in the stock's price was due to factors that the perpetual market could not have priced, such as supply. The case of SpaceX highlights the increasing influence of the derivatives market in price discovery, even in traditional markets. Perpetual futures contracts are excellent at pricing demand but are blind to supply, which is an important consideration in understanding market dynamics.