How Perpetual Futures Shape Bitcoin and Ether Prices

The process of setting cryptocurrency prices is often misunderstood, with many believing it to be driven by spot trading. However, perpetual futures, also known as perpetual swaps or 'perps,' have become the primary driver of price discovery in the crypto market, accounting for roughly 93% of all crypto futures volume. These contracts, which can be held indefinitely, have been shown to lead price movements in the underlying spot market. Research has consistently pointed to derivatives as the primary source of price formation, with perpetual swaps on unregulated venues being particularly influential. The funding rate, which is the cost of holding a perpetual contract, serves as a tether to the underlying price and a live readout of market sentiment. The recent example of SpaceX's IPO, where perpetual futures contracts accurately predicted the stock's opening price, demonstrates the power of these markets in price discovery. The derivatives market's ability to price demand, but not supply, is a key factor in its influence on cryptocurrency prices.