The Dominance of Perpetual Futures in Crypto Markets and Beyond

The process of setting crypto prices is often misunderstood, with many believing it is determined by spot trading. However, for years, perpetual futures, also known as perps, have played a significant role in shaping the prices of bitcoin, ether, and other cryptocurrencies. 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 perps is that the latter do not have a settlement date, allowing them to be held indefinitely by paying a funding rate that varies daily. Research has shown that derivatives markets, particularly those for perpetual swaps on unregulated venues, are often the first to reflect new information and thus lead price discovery. For instance, a study published in the Journal of Financial Markets found that perpetual swaps were the strongest instruments for bitcoin price discovery, with regulated futures and U.S. spot exchanges reacting to these moves rather than leading them. Other studies have identified Binance's perpetual market as a primary source of price formation in the fragmented crypto landscape. While the evidence is not conclusive, with some studies suggesting spot markets still lead at certain frequencies or during times of stress, the overall direction of research points to derivatives markets as the primary location for price discovery. This is further supported by observations from market participants, such as Julio Moreno, head of research at CryptoQuant, who noted that perps have led price rallies during bear markets. The funding rate, which is paid by the crowded side of the trade every few hours, serves as both an anchor to the underlying price and a real-time sentiment indicator. However, for traders holding directional positions over extended periods, the funding rate can be seen as merely eating into their profits rather than providing new market insights. A notable example of the influence of perpetual futures extends beyond cryptocurrency to the traditional market, as seen in the case of SpaceX's initial public offering (IPO). Before SpaceX's listing, traders were already buying and selling exposure to the company through pre-IPO perpetual futures on platforms like Binance, Coinbase, and Hyperliquid. These contracts, structured to track an implied valuation rather than a share price, allowed traders to bet on the company's value before its public listing. Interestingly, the perpetual futures market accurately priced SpaceX's valuation, with contracts on Hyperliquid and Binance quoting the equivalent of roughly $170 a share, significantly higher than the $135 IPO price set by underwriters. When SpaceX began trading on the Nasdaq, its stock price closely followed the predictions of the perpetual futures market, reaching an intraday high above $176 and closing its first session at $161, up 19% from the IPO price. This accuracy in pricing demonstrates the significant role derivatives markets can play in price discovery, even in traditional equity markets. However, the subsequent drop in SpaceX's stock price, falling over 40% from its peak, highlights the limitations of perpetual futures in pricing supply-side factors, such as the availability of shares for sale. In conclusion, the dominance of perpetual futures in crypto markets and their influence on traditional markets, as seen in the SpaceX IPO, underscore the importance of derivatives in price discovery. While spot markets still have a role, the evidence suggests that perps are increasingly where prices are made, with their influence extending beyond cryptocurrencies to other assets.