The Dominance of Perpetual Futures in Crypto Markets

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 dominant force in the market, accounting for around 93% of all crypto futures volume. These contracts are leverage-friendly, never expire, and can be held indefinitely by paying a funding rate. Research has shown that derivatives markets, particularly perpetual swaps, are the primary source of price discovery for bitcoin and other cryptocurrencies. A study found that perpetual swaps on unregulated venues were the strongest instruments for bitcoin price discovery, with regulated futures and US spot exchanges reacting to, rather than leading, these moves. The evidence suggests that the derivatives market is where prices are made, with spot markets following. This phenomenon was recently demonstrated in the pre-IPO trading of SpaceX, where perpetual futures contracts accurately predicted the company's valuation before its listing on the Nasdaq. The use of perpetual futures in this context highlights their ability to price demand, but not supply, which can lead to significant price movements when underlying market conditions change.