The Dominance of Perpetual Futures in Crypto Markets and Beyond

The mechanism 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 dominant force in the crypto market, accounting for around 93% of all crypto futures volume. These contracts, which never expire, have been shown to lead price discovery, with research indicating that they are the primary source of new information in the market. A study in the Journal of Financial Markets found that perpetual swaps on unregulated venues were the strongest instruments for bitcoin price discovery, with regulated futures and U.S. spot exchanges reacting to, rather than leading, these moves. The funding rate, which is the cost of holding a perpetual contract, plays a crucial role in keeping the contract price anchored to the underlying asset and is closely watched by traders as a sentiment indicator. The influence of perps was recently demonstrated in the pricing of the SpaceX IPO, where perpetual futures contracts traded on crypto exchanges accurately predicted the stock's first-day price, outperforming traditional Wall Street underwriters. This highlights the growing importance of derivatives markets in price discovery, not just in crypto but also in traditional assets.