The Dominance of Perpetual Futures in Crypto Markets and Beyond

The process of setting 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 primary driver of price discovery in the crypto market, accounting for roughly 93% of all crypto futures volume. These contracts, which never expire and are leverage-friendly, have been shown to lead price movements in bitcoin and ether. Research has consistently pointed to derivatives markets, particularly perpetual swaps on unregulated venues, as the primary source of price formation. The evidence is not conclusive, but the trend suggests that derivatives markets are where prices are made. This phenomenon was recently demonstrated in the pricing of SpaceX's initial public offering, where perpetual futures contracts accurately predicted the company's stock price. The derivatives market's ability to price demand has been shown to be highly effective, but its blindness to supply can lead to significant price movements. The influence of perpetual futures extends beyond the crypto market, and their impact on traditional markets is becoming increasingly apparent.