How Perpetual Futures Dominate Bitcoin and Ether Markets, and a Surprising Example with SpaceX

The process of setting crypto prices is often misunderstood, with many believing it involves spot trading where buyers and sellers meet on an exchange. However, for years, the actual driver of bitcoin, ether, and broader crypto market prices has been perpetual futures, also known as perpetual swaps or 'perps.' These contracts are leverage-friendly, never expire, and account for roughly 93% of all crypto futures volume, with daily volume often surpassing 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. Various studies have explored which market 'discovers' a bitcoin price first, with the answer consistently pointing to derivatives. For instance, a study in the Journal of Financial Markets found that perpetual swaps on unregulated venues were the strongest instruments for bitcoin price discovery, with regulated futures and U.S. spot exchanges reacting to these moves rather than leading them. Other research has identified Binance's perpetual market as the primary source of price formation across the fragmented crypto landscape. While the evidence is not entirely conclusive, with some studies suggesting spot markets still lead at certain frequencies or during periods of stress, the overall direction of the literature supports the derivatives market as the primary place where prices are made. 'Historically, we have seen perps leading mostly during bear market price rallies,' according to Julio Moreno, head of research at CryptoQuant. This phenomenon is closely related to the funding rate, which acts as a tether keeping the contract price anchored to the underlying asset and serves as a live readout of market sentiment. Traders watch the funding rate closely, alongside price movements. The funding rate is paid by the crowded side of the trade every few hours, nudging the contract price back toward the underlying price when it trades above spot. This mechanism is essential for understanding how perpetual futures influence market prices. A notable example of the power of perpetual futures in price discovery is the initial public offering (IPO) of SpaceX. Before the company's listing on the Nasdaq, traders on various platforms, including Binance, Coinbase, and Hyperliquid, were buying and selling exposure to SpaceX through pre-IPO perpetual futures contracts. These contracts were structured to track an implied valuation rather than a share price. The first such contract went live on Hyperliquid on May 18, with Binance and Coinbase following suit. The striking aspect of this scenario is how accurately these perpetual futures contracts predicted the first-day trading price of SpaceX. On the night before the listing, perpetuals on Hyperliquid and Binance were quoting the equivalent of roughly $170 a share, significantly above the $135 IPO price set by underwriters. When SpaceX began trading, it opened at a price close to the predictions of the perpetual futures market, peaking above $176 and closing its first session at $161, up 19% from the IPO price. This example illustrates the derivatives market's ability to read demand more accurately than traditional banking institutions, at least in the context of the IPO. However, the subsequent performance of SpaceX's stock, which has fallen more than 40% from its peak due to supply-side factors, highlights the limitations of perpetual futures in pricing supply. The derivatives market is excellent at pricing demand but blind to supply, a crucial distinction in understanding market dynamics. The SpaceX example, in the extreme, demonstrates what research suggests is already true in ordinary crypto trading: the derivatives market is increasingly where price discovery occurs, with spot markets following.