How Perpetual Futures Dominate Bitcoin and Ether Markets, and the Surprising Lesson from SpaceX

The process of setting crypto prices is often misunderstood, with many believing it occurs through spot trading. However, the reality is that perpetual futures, also known as perpetual swaps or 'perps,' play a much larger role in determining prices for bitcoin, ether, and the broader crypto market. These leverage-friendly contracts never expire and currently account for approximately 93% of all crypto futures volume, with daily perp volume often surpassing the spot market. Unlike traditional futures contracts, which have a settlement date where their price must meet the spot price of the underlying asset, perpetuals can be held indefinitely by paying a funding rate that 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, rather than leading, these moves. The evidence suggests that the derivatives market is where prices are made, with spot markets following. This phenomenon was recently illustrated by the pre-IPO trading of SpaceX, where perpetual futures contracts accurately predicted the company's initial public offering price. Traders on various exchanges, including Binance and Coinbase, were able to buy and sell exposure to SpaceX through pre-IPO perpetual futures, which were structured to track an implied valuation rather than a share price. The accuracy of these contracts in predicting the IPO price highlights the significance of perpetual futures in price discovery, even in traditional markets. The funding rate, which is the cost of holding a perpetual contract, plays a crucial role in this process, as it provides a live readout of market sentiment. While the funding rate is essential for traders, it can also be a double-edged sword, as it can eat into profits while traders wait for their positions to become profitable. The story of SpaceX's IPO serves as a prime example of how perpetual futures can dominate price discovery, even in the absence of a traditional spot market. As the crypto market continues to evolve, it is likely that perpetual futures will remain a key driver of price discovery, with spot markets following their lead.