The Dominance of Perpetual Futures in Crypto Markets and Beyond

The process of setting crypto prices has evolved beyond traditional spot trading, where buyers and sellers meet on an exchange. For years, perpetual futures, also known as perpetual swaps or 'perps,' have played a crucial role in determining the prices of bitcoin, ether, and other cryptocurrencies. These contracts, which never expire, account for approximately 93% of all crypto futures volume, with daily perp volume often surpassing the underlying spot market. Unlike traditional futures contracts, which have a settlement date and are forced to meet the spot price of the underlying asset, perpetual futures can be held indefinitely, with traders paying a funding rate that varies daily. 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 evidence suggests that the derivatives market, particularly perpetual futures, is where prices are made, with spot markets following. This phenomenon was recently observed in the SpaceX IPO, where perpetual futures contracts accurately predicted the company's stock price before it began trading. The perpetual market's ability to price demand, but not supply, is a key factor in its influence on price discovery. As the crypto market continues to evolve, the role of perpetual futures in shaping prices will likely remain significant.