Perpetual Futures Dominate Bitcoin and Ether Markets, Shaping Price Discovery

The process of setting crypto prices is often misunderstood, with many believing it occurs through spot trading, where buyers and sellers meet on an exchange. However, perpetual futures, also known as perpetual swaps or 'perps,' have become the primary drivers of price discovery in the bitcoin, ether, and broader crypto markets. These leverage-friendly contracts never expire and account for roughly 93% of all crypto futures volume, with daily perp volume often surpassing the spot market. A key difference between traditional futures contracts and perps is the absence of a settlement date in the latter, allowing them to be held indefinitely by 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 U.S. spot exchanges reacting to, rather than leading, these moves. The evidence suggests that the derivatives market is where prices are made, with the direction of the literature over the past few years pointing toward perps as the primary source of price formation. Historically, perps have led mostly during bear market price rallies, with spot demand contracting while perps demand expanded. 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 and provides a live readout of sentiment. Traders watch the funding rate closely, as it can impact their positions. The use case of SpaceX, which priced its record $75 billion initial public offering at $135 a share, demonstrates the influence of perps. Traders on Binance, Coinbase, Hyperliquid, and others bought and sold exposure to the company through pre-IPO perpetual futures, which accurately predicted the stock's opening price. The perpetual market was pricing SpaceX well above the $135 IPO price, allowing traders to buy the contract before listing and bet on the gap closing. However, the stock's subsequent fall of over 40% from its June peak was due to supply issues, which the perp market could not have priced. This example highlights the importance of understanding the role of perps in shaping price discovery and the limitations of their influence.