Perpetual Futures Dominate Bitcoin and Ether Markets, Demonstrating Their Influence

The process of setting crypto prices is often misunderstood, with many believing it involves spot trading where buyers and sellers meet on an exchange. However, for years, perpetual futures, also known as perpetual swaps or 'perps', have been the primary driver of price discovery for bitcoin, ether, and the broader crypto markets, accounting for roughly 93% of all crypto futures volume. Perpetual futures are leverage-friendly contracts that never expire and can be held indefinitely by paying a funding rate that varies daily. Research has shown that derivatives markets, particularly perpetual swaps on unregulated venues, are the strongest instruments for bitcoin price discovery, with regulated futures and U.S. spot exchanges reacting to, rather than leading, these moves. A study found that Binance's perpetual market is the primary source of price formation across the fragmented crypto landscape. While the evidence is not conclusive, and some studies suggest spot markets still lead at certain frequencies or during stress, the direction of the literature points towards the derivatives market as the place where prices are made. Historically, perpetual futures have led price rallies, particularly during bear markets. The funding rate, which is paid by the crowded side of the trade every few hours, serves as a tether that keeps the contract anchored to the underlying price and provides a live readout of sentiment. Traders watch the funding rate closely, as it can indicate the market's direction. The use of perpetual futures to predict the valuation of SpaceX ahead of its IPO demonstrates their influence and accuracy. Traders on Binance, Coinbase, and other platforms were buying and selling exposure to SpaceX through pre-IPO perpetual futures, which accurately predicted the company's valuation. The perpetual market was pricing SpaceX well above the $135 IPO price, and when the stock began trading, it opened at $161, up 19%. The gap between the perp and the eventual opening price closed on its own, as the contracts were built to automatically switch over to SpaceX's real share price. However, the stock has since fallen more than 40% from its June peak, due to supply issues that the perp market could not have priced. The example of SpaceX highlights the increasing influence of the derivatives market in price discovery, where spot markets follow.