The Dominance of Perpetual Futures in Crypto Markets and Beyond

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, the reality is that perpetual futures, also known as perps, have been the dominant force in crypto markets for years, accounting for approximately 93% of all crypto futures volume. These contracts, which never expire, allow for leverage and are traded in large volumes, often exceeding the underlying spot market. 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 these moves rather than leading them. The evidence suggests that the derivatives market is where prices are made, with spot markets following. This phenomenon was recently observed in the SpaceX IPO, where perpetual futures contracts accurately predicted the company's stock price before it began trading. The influence of perps is not limited to crypto markets, as they have also been used to trade exposure to traditional assets like stocks. The SpaceX example highlights the ability of perps to price demand, but their limitations in accounting for supply. As the crypto market continues to evolve, understanding the role of perpetual futures in price discovery is crucial for investors and traders alike.