The Dominance of Perpetual Futures in Crypto Markets

The mechanism of price setting in the crypto market has evolved beyond traditional spot trading, with perpetual futures, also known as perps, playing a significant role. These contracts, which never expire, have become the primary drivers of price discovery for bitcoin, ether, and other cryptocurrencies, accounting for roughly 93% of all crypto futures volume. A study in the Journal of Financial Markets found that perpetual swaps on unregulated venues were the strongest instruments for bitcoin price discovery. The evidence suggests that the derivatives market is where prices are made, with spot exchanges reacting to rather than leading these moves. The funding rate, a cost associated with holding a perpetual contract, serves as a tether that keeps the contract anchored to the underlying price and provides a live readout of market sentiment. The use case of SpaceX, which had its IPO priced more accurately by perpetual futures contracts than traditional Wall Street methods, further illustrates the influence of perps in price discovery. However, perps are excellent at pricing demand but blind to supply, which can lead to significant price movements when underlying supply factors come into play, as seen in the post-IPO price drop of SpaceX.