Perpetual Futures Dominate Bitcoin and Ether Markets, Demonstrating Their Influence

The process of setting crypto prices is often misunderstood, with many believing it involves spot trading, where buyers and sellers meet on an exchange. However, the reality is that perpetual futures, also known as perpetual swaps or 'perps,' have become the primary driver of price discovery in the bitcoin and ether markets, accounting for approximately 93% of all crypto futures volume. Perps are leverage-friendly contracts that never expire and can be held indefinitely by paying a funding rate, which varies daily. Research has shown that perps are the strongest instruments for bitcoin price discovery, with regulated futures and US spot exchanges reacting to, rather than leading, these moves. A study in the Journal of Financial Markets found that perpetual swaps on unregulated venues were the primary source of price formation for bitcoin. Other work has identified Binance's perpetual market as the main driver of price formation across the crypto landscape. While the evidence is not conclusive, and some studies suggest spot trading still leads at certain frequencies or during times of stress, the majority of research points to the derivatives market as the primary location for price discovery. Historically, perps have led price rallies during bear markets, with demand growth in perps leading price increases. The funding rate, which is paid by the crowded side of the trade every few hours, serves as a tether to the underlying price and a live readout of sentiment. Traders watch the funding rate closely, as it provides insight into market sentiment. The use of perps is not limited to crypto markets, as demonstrated by the SpaceX IPO, where traders used pre-IPO perpetual futures to predict the company's valuation. The perpetual market accurately predicted the first-day demand for SpaceX, with the stock price printing almost exactly where the perps had it. This example highlights the influence of perps in pricing demand and their limitations in accounting for supply. The derivatives market is increasingly where price discovery occurs, with spot markets following. Perps are excellent at pricing demand but blind to supply, which is essential to remember when analyzing market trends.