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, the reality is that perpetual futures, also known as perps, play a much more significant role in determining prices. These contracts, which have no expiration date, account for around 93% of all crypto futures volume and have been shown to lead price discovery in the markets. Research has consistently pointed to derivatives, particularly perpetual swaps on unregulated venues, as the primary drivers of bitcoin price discovery. The evidence suggests that perps lead the way, especially during bear market price rallies, with spot markets reacting to their movements. The funding rate, which is used to keep perp prices in line with spot prices, is also an important indicator of market sentiment. A recent example of the power of perps can be seen in the SpaceX IPO, where traders were able to accurately predict the stock's performance using pre-IPO perpetual futures. This highlights the growing influence of derivatives in price discovery, not just in crypto markets but also in traditional markets.