The Dominance of Perpetual Futures in Crypto Markets and Beyond

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 never expire, have been shown to lead the way in price discovery, with research indicating that they are the primary source of new information entering the market. A study published 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, rather than leading, these moves. Other research has identified Binance's perpetual market as the primary source of price formation across the fragmented crypto landscape. The evidence is not conclusive, but the direction of the literature suggests that the derivatives market is where prices are made. Historically, perps have led the way during bear market price rallies, with demand growth in the perps market leading price rallies in January and April-May 2026, despite contracting demand on the spot market. The funding rate, which is the cost of holding a perpetual contract, plays a crucial role in keeping the contract price anchored to the underlying asset and provides a live readout of market sentiment. Some traders watch the funding rate closely, as it can provide valuable insights into market sentiment. However, others view it as just another data point to interpret, and instead focus on the predictability of the market. The use of perpetual futures contracts is not limited to the crypto market, as seen in the case of SpaceX's initial public offering (IPO). Traders on various exchanges, including Binance and Coinbase, were able to buy and sell exposure to the company through pre-IPO perpetual futures contracts, which were structured to track an implied valuation rather than a share price. The striking aspect of this is how accurately these contracts priced the company's valuation, with the perpetuals on Hyperliquid and Binance quoting the equivalent of roughly $170 a share, well above the $135 IPO price set by the underwriters. The next day, the stock opened at $161, up 19%, and printed almost exactly where the perps had it, demonstrating the accuracy of the derivatives market in pricing the company's valuation. This gap between the perp price and the IPO price provided a trading opportunity, as traders could buy the contract before listing and bet on the two prices meeting. However, the perpetual market's inability to price supply meant that it was blind to the fact that only a small portion of SpaceX's shares were sold at the IPO, and that a large number of insider shares would become eligible to sell in the coming months. This highlights the limitations of perpetual futures contracts in pricing certain aspects of a company's valuation. In conclusion, the dominance of perpetual futures contracts in the crypto market is a phenomenon that is worth understanding, as it has significant implications for how prices are discovered and how markets function. The use of these contracts in traditional markets, such as the SpaceX IPO, demonstrates their versatility and accuracy in pricing valuations, but also highlights their limitations in certain situations.