The Dominance of Perpetual Futures in Crypto Markets

The process of determining crypto prices is often misunderstood, with many assuming it is driven by spot trading. However, perpetual futures, also known as perpetual swaps or 'perps,' have become the dominant force in the crypto market, accounting for approximately 93% of all crypto futures volume. These contracts are leverage-friendly, have no expiration date, and can be held indefinitely by paying a daily funding rate. Research has shown that perps are the primary source of price formation in the crypto market, with spot exchanges reacting to price movements initiated in the derivatives market. A study published in the Journal of Financial Markets found that perpetual swaps on unregulated venues were the strongest instruments for bitcoin price discovery. Another study identified Binance's perpetual market as the primary source of price formation across the fragmented crypto landscape. The evidence suggests that perps lead price movements, particularly during bear market rallies. For example, Bitcoin perps demand growth led the price rallies of January 2026 and April-May 2026, despite spot demand contracting. The funding rate, which is paid by the crowded side of the trade every few hours, serves as a tether that keeps the contract price anchored to the underlying spot price and provides a live readout of market sentiment. Some traders closely watch the funding rate, while others view it as a cost that eats into their profit and loss. The use of perps in pricing private companies like SpaceX has also been explored. In the lead-up to SpaceX's initial public offering, traders on exchanges like Binance and Hyperliquid were buying and selling exposure to the company through pre-IPO perpetual futures. These contracts were structured to track an implied valuation rather than a share price. The perpetual market accurately priced SpaceX's first-day demand, with the stock opening at a price that was close to the predicted value. However, the perpetual market's inability to account for supply factors, such as the release of locked-up insider shares, ultimately led to a significant decline in the stock price. This example highlights the dominance of perps in price discovery and their limitations in accounting for supply-side factors.