The Dominance of Perpetual Futures in Crypto Markets: A Lesson from SpaceX

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 dominant force in shaping crypto prices, accounting for approximately 93% of all crypto futures volume. These contracts, which never expire, allow traders to bet on the price of an asset without actually owning it, and their influence can be seen in the way they drive price discovery. A study in the Journal of Financial Markets found that perpetual swaps on unregulated venues were the strongest instruments for bitcoin price discovery, with regulated futures and U.S. 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 price. This rate is both a tether that keeps the contract price in check and a live readout of market sentiment, making it a closely watched metric by traders. The use of perpetual futures contracts in pricing the SpaceX IPO is a prime example of their influence, with traders on Binance, Coinbase, and other platforms buying and selling exposure to the company through pre-IPO perpetual futures. These contracts, which were structured to track an implied valuation rather than a share price, accurately predicted the first-day demand for SpaceX shares, with the perpetual market pricing the stock well above the $135 IPO price. The success of these contracts in predicting the IPO price highlights the growing importance of derivatives markets in price discovery, with spot markets following their lead. The reason for this is that perpetual futures contracts are excellent at pricing demand but blind to supply, which can lead to significant price movements when supply becomes a factor, as seen in the case of SpaceX, where the stock price has fallen over 40% from its peak due to the release of locked-up insider shares.