The Dominance of Perpetual Futures in Bitcoin and Ether Markets

The process of setting a crypto price is often misunderstood, with many believing it to be driven by spot trading. However, perpetual futures, also known as perpetual swaps or 'perps,' have become the dominant force in crypto markets, accounting for roughly 93% of all crypto futures volume. These contracts are leverage-friendly, never expire, and can be held indefinitely by paying a funding rate. Research has shown that perpetual swaps on unregulated venues are the strongest instruments for bitcoin price discovery, with regulated futures and US spot exchanges reacting to, rather than leading, these moves. The evidence suggests that the derivatives market is where the price is made, with spot markets following. This phenomenon was recently demonstrated in the case of SpaceX, where perpetual futures contracts accurately predicted the company's IPO price, outperforming traditional market predictions. The success of these contracts in predicting demand, however, also highlights their limitations in accounting for supply. As the crypto market continues to evolve, the influence of perpetual futures is likely to remain a significant factor in shaping prices.