The Dominance of Perpetual Futures in Shaping Bitcoin and Ether Markets

The process of establishing a crypto price is often misunderstood, with many believing it is solely determined by spot trading. However, for years, perpetual futures, also known as perpetual swaps or 'perps,' have played a significant role in shaping the prices of bitcoin, ether, and the broader crypto market. These contracts, which never expire, account for approximately 93% of all crypto futures volume, with daily volumes often surpassing those of the underlying spot market. A key difference between traditional futures contracts and perpetual swaps is the absence of a settlement date in the latter, allowing them to 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 U.S. spot exchanges reacting to, rather than leading, these moves. The evidence is not conclusive, but the direction of the literature suggests that the derivatives market is where prices are made. The funding rate, which is both a tether keeping the contract anchored and a live readout of sentiment, is closely watched by traders. The use of perpetual futures to predict the stock price of SpaceX, which had never sold a public share, demonstrates the influence of these contracts. Traders on various platforms, including Binance, Coinbase, and Hyperliquid, were buying and selling exposure to the company through pre-IPO perpetual futures, which accurately predicted the stock's opening price. This example highlights the dominance of perpetual futures in shaping market prices, with spot markets following their lead. The derivatives market excels at pricing demand but is blind to supply, a crucial consideration in understanding market dynamics.