The Dominance of Perpetual Futures in Crypto Markets

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. These contracts, which never expire, account for around 93% of all crypto futures volume and are highly leveraged. The funding rate, which varies daily, is the cost of holding a perp and is a key factor in determining the price. Research has shown that perps are leading the price discovery process, with some studies indicating that they are the primary source of price formation. The use of perps in predicting the valuation of SpaceX ahead of its IPO is a notable example of their influence. Despite the accuracy of perps in predicting demand, they are blind to supply, which can lead to significant price movements. The dominance of perps in the crypto market is expected to continue, with spot markets following their lead.