How Perpetual Futures Dominate Bitcoin and Ether Markets, as Evidenced by SpaceX's Record IPO

The process of setting cryptocurrency prices is often misunderstood, with many believing it involves spot trading, where buyers and sellers meet on an exchange. However, the reality is that perpetual futures, also known as perpetual swaps or 'perps,' play a significant role in determining prices for bitcoin, ether, and the broader crypto market. These contracts, which never expire, account for roughly 93% of all crypto futures volume, with daily perp volume often exceeding the 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 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. A study in the Journal of Financial Markets found that perpetual swaps were the primary source of price formation for bitcoin, while other work has identified Binance's perpetual market as the primary source of price formation across the fragmented crypto landscape. While the evidence is not conclusive, and some studies find that spot markets still lead at certain frequencies or during stress, the direction of the literature over the past few years has been toward the derivatives market as the place where the price is made. The funding rate, which is the cost of holding a perpetual contract, is both the tether that keeps the contract anchored and a live readout of sentiment, which is why some traders watch it as closely as price. The use of perpetual futures is not limited to cryptocurrency markets, as evidenced by the recent initial public offering (IPO) of SpaceX, which was priced at $135 a share and began trading on the Nasdaq on June 12. Well before the IPO, traders on Binance, Coinbase, Hyperliquid, and others were already buying and selling exposure to the company through pre-IPO perpetual futures, or contracts structured to track an implied valuation rather than a share price. The striking part is how accurate these perpetual futures were in predicting the IPO price, with the contracts on Hyperliquid and Binance quoting the equivalent of roughly $170 a share, well above the $135 IPO price. The next day, the stock opened at $161, up 19%, and printed almost exactly where the perps had it, demonstrating that a market dominated by leverage-seeking retail traders had read first-day demand more accurately than the banks that spent months building the offering price. This example highlights the increasingly important role of perpetual futures in price discovery, not just in cryptocurrency markets but also in traditional markets. However, it also shows the limitations of perpetual futures in pricing supply, which can have a significant impact on market trends. In the case of SpaceX, the stock has fallen more than 40% from its June peak, dropping from the $135 IPO price to about $115, due to the release of locked-up insider shares. This example demonstrates that while perpetual futures are excellent at pricing demand, they are blind to supply, which is worth remembering every time a bitcoin rally or a flush starts in the funding rate before it reaches spot.