The Dominance of Perpetual Futures in Crypto Markets and Beyond

The process of determining 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 dominant force in crypto markets, accounting for approximately 93% of all crypto futures volume. These contracts, which never expire, allow traders to leverage their positions and have become the primary source of price formation in the crypto landscape. Research has shown that perpetual swaps on unregulated venues, such as Binance's perpetual market, are the strongest instruments for bitcoin price discovery, with regulated futures and US spot exchanges reacting to, rather than leading, these moves. The funding rate, which is the cost of holding a perpetual contract, plays a crucial role in keeping the contract price anchored to the underlying asset and provides a live readout of market sentiment. A recent example of the power of perpetual futures was seen in the pre-IPO trading of SpaceX, where traders on Binance, Coinbase, and other platforms were able to accurately predict the company's share price, outperforming traditional Wall Street banks. This highlights the increasing importance of the derivatives market in price discovery, with spot markets following. While perpetual futures are excellent at pricing demand, they are blind to supply, which can lead to significant price movements when supply and demand imbalance.