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 perpetual swaps or 'perps,' have become the dominant force in crypto markets, accounting for approximately 93% of all crypto futures volume. These contracts, which never expire, allow for leverage and are settled through a funding rate that varies daily. 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 prices are made, with spot markets following. This phenomenon was recently demonstrated in the pricing of SpaceX's initial public offering, where perpetual futures contracts accurately predicted the company's stock price before it began trading. The accuracy of these contracts highlights the importance of the derivatives market in price discovery, even in traditional markets. The funding rate, which is used to settle perpetual contracts, is also a key indicator of market sentiment, with traders closely watching it to gauge the direction of the market. While the spot market still plays a role in price discovery, particularly during times of stress, the trend is clear: perpetual futures are driving the prices of cryptocurrencies and other assets.