The Dominance of Perpetual Futures in Crypto Markets and Beyond

The process of setting crypto prices is often misunderstood, with many believing it to be the result of 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 been driving the price discovery for bitcoin, ether, and the broader crypto market for years. These contracts, which never expire and are leverage-friendly, account for approximately 93% of all crypto futures volume, with daily perp volume often surpassing the spot market. The absence of a settlement date in perpetual futures means that their prices are not forced to meet the spot price of the underlying asset, 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. 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. The evidence is not conclusive, and some studies find that spot still leads at certain frequencies or during stress, but the direction of the literature has been toward the derivatives market as the place where the price is made. The funding rate, which is paid by the crowded side of the trade every few hours, serves as a tether that keeps the contract anchored to the underlying price and provides a live readout of sentiment. Traders watch the funding rate closely, as it can provide valuable insights into market sentiment. The use of perpetual futures to predict the price of SpaceX's initial public offering (IPO) is a notable example of their influence. Traders on Binance, Coinbase, Hyperliquid, and others were buying and selling exposure to SpaceX through pre-IPO perpetual futures, which were structured to track an implied valuation rather than a share price. The first mover was Hyperliquid, which launched a synthetic SpaceX perpetual on May 18, followed by Binance on May 21, Coinbase on June 4, and other exchanges later. The striking aspect of this is how accurately the perpetuals priced the stock, with Hyperliquid and Binance quoting the equivalent of roughly $170 a share, well above the $135 set by the underwriters. On the day of the IPO, SpaceX opened at $161, up 19%, and the stock printed almost exactly where the perps had it, demonstrating that the perpetual market had read first-day demand more accurately than the banks that spent months building the offering price. This gap between the perp and the eventual opening price was where the money was, as traders could buy the contract before listing and bet that the two would meet. The perpetual market was pricing SpaceX well above the $135 IPO price, allowing traders to capitalize on the difference. However, the reason for the subsequent decline in the stock price was one that the perp could never have priced - supply. Only a sliver of SpaceX's shares were sold at the IPO, and starting around August 6, roughly 900 million locked-up insider shares became eligible to sell. This example illustrates the dominance of perpetual futures in price discovery, not just in crypto markets but also in other areas, such as IPOs. The derivatives market is increasingly where price gets discovered, and spot follows.