Perpetual Futures Dominate Bitcoin and Ether Markets, Proving Their Influence

The process of setting crypto prices is often misunderstood, with many believing it is driven by spot trading, where buyers and sellers meet on an exchange. However, perpetual futures, also known as perps, have become the primary driver of price discovery in the crypto market, accounting for around 93% of all crypto futures volume. These contracts, which can be held indefinitely, have been shown to lead the spot market in terms of price formation. Research has consistently pointed to derivatives, particularly perpetual swaps on unregulated venues, as the strongest instruments for bitcoin price discovery. A study published in the Journal of Financial Markets found that perpetual swaps were the primary source of price formation for bitcoin, with regulated futures and US spot exchanges reacting to, rather than leading, these moves. Other work has identified Binance's perpetual market as the primary source of price formation across the fragmented crypto landscape. The evidence suggests that perps lead the market, particularly during bear market price rallies, with spot demand often contracting while perps demand expands. The funding rate, which is paid by the crowded side of the trade every few hours, serves as a tether that keeps the contract anchored to the underlying price and provides a live readout of market sentiment. Traders closely watch the funding rate, as it can provide valuable insights into market trends. The use of perps in pricing SpaceX's IPO is a notable 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 accurately predicted the company's listing price, with the perpetuals on Hyperliquid and Binance quoting the equivalent of roughly $170 a share, well above the $135 IPO price set by underwriters. The stock's first-day performance closely matched the predictions of the perps, with the market dominated by leverage-seeking retail traders reading first-day demand more accurately than the banks that spent months building the offering price. The success of perps in pricing SpaceX's IPO highlights their ability to accurately predict market trends, but also their limitations, particularly when it comes to pricing supply. As the crypto market continues to evolve, it is likely that perps will remain a key driver of price discovery, with spot markets following their lead.