The Dominance of Perpetual Futures in Crypto Markets: A Lesson from SpaceX

The process of setting crypto prices has evolved over the years, with perpetual futures, or 'perps,' now playing a crucial role in determining the value of cryptocurrencies such as bitcoin and ether. These contracts, which never expire, have become the primary source of price formation, accounting for approximately 93% of all crypto futures volume. 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. The evidence suggests that the derivatives market is where prices are made, with spot markets following. This phenomenon was recently demonstrated in the case of SpaceX, where perpetual futures contracts accurately predicted the company's valuation before its initial public offering. The use of perpetual futures to predict SpaceX's valuation highlights the influence of these contracts in the market, even in the absence of a spot market. The accuracy of these contracts in predicting the company's valuation was impressive, with the perpetual market pricing SpaceX well above the $135 IPO price, which was later confirmed by the stock's performance on its first day of trading. However, the perpetual market's inability to account for supply factors, such as the release of locked-up insider shares, led to a subsequent decline in the stock's price. This example illustrates the importance of understanding the role of perpetual futures in the crypto market and their potential to drive price discovery, even in the absence of traditional spot markets.