How Perpetual Futures Dominate Bitcoin and Ether Pricing

The process of setting a crypto price is often misunderstood, with many believing it involves spot trading on exchanges. However, for years, perpetual futures, also known as perpetual swaps or 'perps', have been the primary drivers of price discovery in the crypto markets, accounting for roughly 93% of all crypto futures volume. Perps are leverage-friendly contracts that never expire and can be held indefinitely by paying a funding rate. Research has shown that perps 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, particularly perps, is where prices are made, with spot markets following. This is evident in the way perps led price rallies in bear markets and the way they accurately predicted the stock price of SpaceX after its IPO. The funding rate, which is the cost of holding a perp position, is a key factor in price discovery, as it reflects the sentiment of traders and keeps the contract price anchored to the underlying asset. The use of perps in pricing SpaceX's IPO is a notable example of how these contracts can accurately predict prices, even in the absence of a spot market. The perp market priced SpaceX well above the IPO price, and when the stock listed, it traded close to the perp price, demonstrating the accuracy of the derivatives market in price discovery. However, the subsequent decline in SpaceX's stock price highlights the limitations of perps in pricing supply, which is a critical factor in determining prices. Overall, the dominance of perps in crypto markets underscores the importance of understanding the role of derivatives in price discovery and the need for traders to consider the funding rate and other factors when making investment decisions.