Cryptocurrency Markets Are Shaped by Perpetual Futures, as Demonstrated by SpaceX's IPO

The process of setting cryptocurrency prices is often misunderstood, with many believing it is determined 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 are leverage-friendly, have no expiration date, and can be held indefinitely, with traders paying 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 by the pre-IPO perpetual futures market for SpaceX, which accurately predicted the company's first-day trading price. The perpetual market was able to price demand more accurately than traditional Wall Street underwriters, highlighting the growing influence of derivatives in price discovery. However, the perpetual market's inability to account for supply was exposed when SpaceX's stock price fell following the release of locked-up insider shares. This example illustrates the importance of understanding the role of perpetual futures in shaping cryptocurrency markets and the potential limitations of this market in pricing assets.