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 perps, have become the dominant force in the crypto market, accounting for approximately 93% of all crypto futures volume. These contracts, which can be held indefinitely, allow traders to leverage their positions and have become the primary source of price formation in the fragmented crypto landscape. Research has consistently shown that derivatives markets, particularly perpetual swaps on unregulated venues, lead the way in price discovery, with spot markets and regulated futures reacting to their moves. The funding rate, which is the cost of holding a perpetual contract, serves as a tether to the underlying price and provides a live readout of market sentiment. A recent example of the influence of perps can be seen in the valuation of SpaceX, which was more accurately predicted by crypto traders using perpetual futures contracts than by traditional Wall Street investors. The accuracy of the perps in predicting the IPO price of SpaceX highlights the growing importance of derivatives markets in price discovery, even for private companies. However, the limitations of perps in pricing supply were also evident, as the subsequent decline in SpaceX's stock price was driven by factors that perps could not account for. The dominance of perps in crypto markets is a trend that is likely to continue, with spot markets following their lead. As such, understanding the role of perps in price discovery is crucial for anyone looking to navigate the complex world of crypto trading.