Perpetual Futures Dominate Bitcoin and Ether Markets, Proving Their Influence

The process of setting crypto prices is often misunderstood, with many believing it is driven by spot trading, where buyers and sellers meet on an exchange. However, the reality is that perpetual futures, also known as perpetual swaps or 'perps,' have become the primary drivers of price discovery for bitcoin, ether, and the broader crypto market. These contracts, which never expire, account for approximately 93% of all crypto futures volume, with daily volumes often surpassing those of the underlying spot market. A key difference between traditional futures contracts and perps is the absence of a settlement date in the latter, allowing them to be held indefinitely by 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 U.S. spot exchanges reacting to, rather than leading, these moves. The evidence suggests that the derivatives market, particularly perps, plays a crucial role in setting prices, which is then followed by the spot market. This phenomenon was recently observed in the pricing of SpaceX's IPO, where perpetual futures contracts accurately predicted the company's first-day trading price, outperforming traditional Wall Street estimates. The funding rate, which is used to keep perps prices anchored to the underlying asset, also serves as a sentiment indicator, closely watched by traders. However, the perp market's ability to price demand is not matched by its ability to account for supply, as seen in the subsequent drop in SpaceX's stock price after the IPO. This highlights the importance of understanding the role of perps in price discovery and their limitations in certain market conditions.