How Perpetual Futures Dominate Bitcoin and Ether Markets

The process of setting crypto prices is often misunderstood, with many believing it is driven by spot trading. However, perpetual futures, also known as perpetual swaps or 'perps', have become the primary driver of price discovery in the crypto market, accounting for roughly 93% of all crypto futures volume. These contracts, which never expire, allow traders to bet on the price of an asset without actually owning it. 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 was recently demonstrated by the pre-IPO perpetual futures market for SpaceX, which accurately predicted the company's stock price before it went public. The perpetual market was able to price demand for the stock, but was blind to the supply of locked-up insider shares, which eventually led to a decline in the stock price. This highlights the importance of understanding the role of perpetual futures in driving price discovery in the crypto market.