How Perpetual Futures Dominate Bitcoin and Ether Markets, and What SpaceX Taught Us

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 primary driver of price discovery in the crypto market, accounting for approximately 93% of all crypto futures volume. These contracts, which can be held indefinitely, allow traders to leverage their positions and have been shown to lead price movements in the spot market. Studies have found that perpetual swaps on unregulated venues are the strongest instruments for bitcoin price discovery, with regulated futures and spot exchanges reacting to these moves. The evidence suggests that the derivatives market is where prices are made, with spot markets following. The funding rate, which is the cost of holding a perpetual contract, is a key factor in maintaining price stability and is closely watched by traders. A recent example of the power of perpetual futures was seen in the pricing of SpaceX's initial public offering, where traders on crypto exchanges were able to accurately predict the company's valuation before it listed on the Nasdaq. This example highlights the ability of perpetual futures to price demand, but also their limitations in pricing supply. As the crypto market continues to evolve, it is likely that perpetual futures will remain a key driver of price discovery, and their influence will only continue to grow.