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

The process of setting crypto prices is often misunderstood, with many believing it to be driven by spot trading, where buyers and sellers meet on an exchange. However, the reality is that perpetual futures, also known as perpetual swaps or '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 never expire, allow traders to bet on the price of an asset without actually owning it, and their prices are influenced by a funding rate that varies daily. Research has shown that perpetual swaps on unregulated venues are often the strongest indicators of bitcoin price discovery, with regulated futures and US spot exchanges reacting to these moves rather than leading them. A study by Carol Alexander and co-authors found that perpetual swaps were the primary source of price formation for bitcoin, while other work has identified Binance's perpetual market as a key driver of price formation across the crypto landscape. While the evidence is not conclusive, and some studies suggest that spot trading still plays a role in certain circumstances, the majority of research points to the derivatives market as the primary driver of price discovery. The use of perpetual futures to price SpaceX's pre-IPO valuation is a notable example of their influence, with traders on Binance, Coinbase, and other platforms buying and selling exposure to the company through synthetic perpetual futures. These contracts allowed traders to bet on the company's valuation before its IPO, and their prices were remarkably accurate, with the perpetual market quoting a price equivalent to around $170 per share, well above the $135 IPO price. The stock's first-day performance, which saw it reach an intraday high of over $176 and close at $161, up 19%, was almost exactly in line with the perpetual market's predictions. This example highlights the importance of perpetual futures in price discovery, and demonstrates how they can be used to accurately predict demand for an asset. However, it also notes that perpetual futures are blind to supply, which can have a significant impact on price, as seen in the case of SpaceX's shares, which have fallen over 40% from their peak due to the release of locked-up insider shares.