The Dominance of Perpetual Futures in Crypto Markets

The process of determining cryptocurrency prices is often misunderstood. While many believe that spot trading is the primary mechanism, the reality is that perpetual futures contracts, also known as 'perps', have become the dominant force in the market. These contracts, which never expire, account for approximately 93% of all cryptocurrency futures volume and often have a daily volume that exceeds the underlying spot market. A key characteristic of perpetual futures is that they do not have a settlement date, allowing them to be held indefinitely, albeit with the requirement of paying a funding rate that varies daily. Research has consistently 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 illustrated by the pricing of SpaceX's initial public offering (IPO), where perpetual futures contracts accurately predicted the stock's opening price, outperforming traditional Wall Street predictions. The ability of perpetual futures to price demand, but not supply, is a crucial aspect of their dominance in the market. As the cryptocurrency market continues to evolve, the role of perpetual futures is likely to remain a key factor in determining prices.