The Dominance of Perpetual Futures in Crypto Markets and Beyond

The process of determining crypto prices is often misunderstood, with many believing it involves spot trading on exchanges. However, for several years, perpetual futures, also known as perpetual swaps or 'perps,' have played a significant role in setting prices for bitcoin, ether, and the broader crypto market. These contracts are leverage-friendly, never expire, and account for approximately 93% of all crypto futures volume, with daily volumes often surpassing those of the underlying spot market. Unlike traditional futures contracts that have a settlement date and are forced to meet the spot price of the underlying asset, perpetuals can be held indefinitely by paying a funding rate that varies daily. Research has shown that derivatives markets, particularly those for perpetual swaps on unregulated venues, are where new information enters the market first, leading to price discovery. A study in the Journal of Financial Markets found that perpetual swaps were the strongest instruments for bitcoin price discovery, with regulated futures and U.S. spot exchanges reacting to these moves. Other research has identified Binance's perpetual market as a primary source of price formation across the crypto landscape. While the evidence is not conclusive, with some studies suggesting spot markets still lead at certain frequencies or during stress, the direction of recent literature points towards derivatives markets as the primary place where prices are made. Historically, perpetuals have led price rallies, especially during bear markets. For example, Bitcoin perps demand growth led the price rallies in January and April-May 2026, despite spot demand contracting. The funding rate, which is paid by the crowded side of the trade every few hours, acts as a tether keeping the contract price anchored to the underlying price and serves as a live readout of sentiment. Some traders closely watch the funding rate for insights into market sentiment. The use of perpetual futures in pricing private companies before their IPO, as seen with SpaceX, demonstrates the power of these contracts in price discovery. For about three weeks before SpaceX's $75 billion IPO, traders were buying and selling exposure to the company through pre-IPO perpetual futures on platforms like Binance, Coinbase, and Hyperliquid. These contracts were structured to track an implied valuation rather than a share price. The striking aspect was the accuracy of these perpetuals in predicting SpaceX's first-day trading price. On the night before the IPO, perpetuals on Hyperliquid and Binance were quoting the equivalent of roughly $170 a share, well above the $135 set by underwriters. The stock opened at $161, up 19%, and almost exactly where the perpetuals had priced it, showing that a market dominated by retail traders had read first-day demand more accurately than the banks. However, the stock has since fallen more than 40% from its peak, due to supply issues that the perpetual market could not have priced. This example illustrates what research suggests is true for ordinary crypto trading: the derivatives market is where price discovery happens, and spot markets follow. Perpetuals are excellent at pricing demand but are blind to supply, a crucial distinction to remember in understanding crypto market dynamics.