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, the reality is that perpetual futures, also known as perpetual swaps or 'perps,' have become the dominant force in the crypto market, accounting for approximately 93% of all crypto futures volume. These contracts, which never expire, allow traders to leverage their positions and have become the primary source of price formation in the market. 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 demonstrated in the SpaceX IPO, where perpetual futures contracts accurately predicted the company's initial stock price, outperforming traditional Wall Street predictions. The success of these contracts in pricing demand, albeit with a blind spot for supply, highlights the growing influence of perpetual futures in the financial markets.