The Dominance of Perpetual Futures in Crypto Markets and Beyond

The process of setting crypto prices is often misunderstood, with many believing it occurs through spot trading, where buyers and sellers meet on an exchange. However, for years, the actual driver of price discovery in the crypto market, including for bitcoin and ether, has been perpetual futures, also known as perpetual swaps or 'perps'. These contracts are unique because they never expire and are highly leverage-friendly, accounting for about 93% of all crypto futures volume, with daily volumes often surpassing those of the underlying spot market. Traditional futures contracts have a settlement date when they must match the spot price of the underlying asset, but perpetuals can be held indefinitely by paying a funding rate that varies daily. Research has shown that it is the derivatives market, particularly perpetual swaps on unregulated venues, that often leads in bitcoin price discovery, with regulated futures and spot exchanges reacting to moves initiated in the derivatives market. A study published in the Journal of Financial Markets found that perpetual swaps were the strongest instruments for bitcoin price discovery. Other research has identified Binance's perpetual market as a primary source of price formation in the crypto landscape. While the evidence is not entirely conclusive, with some studies suggesting spot markets still lead at certain times or during periods of stress, the trend in recent literature points towards the derivatives market as the primary location for price discovery. Historically, perpetual futures have been seen to lead price rallies, especially during bear markets. For instance, the growth in demand for Bitcoin perps led the price rallies in January and April-May 2026, despite contracting spot demand. The funding rate, which is paid by the crowded side of the trade every few hours, serves as both an anchor to the underlying price and a real-time sentiment indicator. However, for traders holding long-term positions, the funding rate is more of a cost that eats into their profit and loss rather than a new data point to interpret. The use of perpetual futures is not limited to crypto assets; they were also used to speculate on the valuation of SpaceX before its initial public offering (IPO). For about three weeks, traders on various platforms, including Binance and Coinbase, were buying and selling exposure to SpaceX through pre-IPO perpetual futures contracts. These contracts were structured to track an implied valuation rather than a share price. Notably, the perpetual futures market accurately priced SpaceX's valuation before its IPO, with contracts on Hyperliquid and Binance quoting the equivalent of roughly $170 a share, well above the $135 IPO price set by underwriters. On its first day of trading, SpaceX's stock opened at $161, up 19% from the IPO price, closely matching the predictions of the perpetual futures market. This accuracy underscores the influence and predictive power of perpetual futures in price discovery, even in markets beyond crypto. However, the subsequent drop in SpaceX's stock price, falling over 40% from its peak, was due to factors such as supply, specifically the eligibility of locked-up insider shares to be sold, which the perpetual futures market could not price. This example illustrates the derivatives market's role in price discovery, particularly how perpetual futures can excel at pricing demand but remain blind to supply factors.