Perpetual Futures Dominate Bitcoin and Ether Markets, Proving Their Influence

The process of setting crypto prices is often misunderstood, with many assuming it is driven by spot trading, where buyers and sellers meet on an exchange. However, for years, perpetual futures, also known as perpetual swaps or 'perps,' have played a significant role in setting prices for bitcoin, ether, and other cryptocurrencies. These contracts, which never expire, account for around 93% of all crypto futures volume and often have a higher daily volume than the underlying spot market. Perpetual futures have been shown to lead price discovery, with research indicating that they are the primary source of new information entering the market. 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. 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 conclusive, and some studies suggest that spot markets still lead at certain frequencies or during times of stress, the majority of research points to derivatives markets as the primary driver of price discovery. 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 spot price. However, it can also provide a live readout of market sentiment, making it a closely watched metric by traders. The recent SpaceX IPO provides a prime example of the influence of perpetual futures. Traders on platforms such as Binance, Coinbase, and Hyperliquid were able to buy and sell exposure to SpaceX through pre-IPO perpetual futures, which accurately predicted the company's valuation. The perpetual market was able to price SpaceX's valuation more accurately than traditional markets, with the stock opening at a price that was close to the predicted value. This example highlights the growing importance of derivatives markets in price discovery, with perpetual futures playing a key role in setting prices for cryptocurrencies and other assets.