The Dominance of Perpetual Futures in Crypto Markets

The process of setting crypto prices is often misunderstood, with many believing it is determined by spot trading. However, perpetual futures, which are leverage-friendly contracts that never expire, now account for approximately 93% of all crypto futures volume. These contracts allow traders to buy and sell exposure to an asset without actually owning it, and their prices are determined by the funding rate, which is paid by the trader on the wrong side of the market every few hours. Research has shown that perpetual swaps on unregulated venues are the strongest instruments for bitcoin price discovery, with regulated futures and US spot exchanges reacting to, rather than leading, these moves. The use of perpetual futures to price private companies, such as SpaceX, has also been demonstrated, with traders on Binance, Coinbase, and other platforms buying and selling exposure to the company through pre-IPO perpetual futures contracts. These contracts were able to accurately predict the company's valuation, with the perpetual market pricing SpaceX above its IPO price, allowing traders to profit from the gap. However, the limitations of perpetual futures in pricing supply have also been highlighted, with the contracts unable to account for the release of locked-up insider shares. Overall, the dominance of perpetual futures in crypto markets is clear, with their influence extending to the valuation of private companies and the discovery of prices for cryptocurrencies.