The Dominance of Perpetual Futures in Crypto Markets and Beyond

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 dominant force in the crypto market, accounting for approximately 93% of all crypto futures volume. These contracts, which never expire, allow traders to buy and sell with leverage, and their prices are influenced by a funding rate that varies daily. Research has shown that perps are the primary source of price discovery for bitcoin, with some studies indicating that they lead the spot market. The funding rate, which is paid by the crowded side of the trade every few hours, acts as a tether to the underlying price and provides a live readout of market sentiment. The influence of perps was recently demonstrated in the SpaceX IPO, where traders on crypto exchanges were able to accurately predict the company's valuation using pre-IPO perpetual futures contracts. This highlights the growing importance of the derivatives market in price discovery, not just in crypto but potentially in other markets as well.