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, where buyers and sellers meet on an exchange. However, perpetual futures, also known as perps, have become the primary drivers of price discovery, accounting for around 93% of all crypto futures volume. These contracts, which never expire, allow traders to take leveraged positions and have been shown to lead price movements in the underlying spot market. Research has consistently pointed to derivatives markets, particularly perpetual swaps on unregulated venues, as the primary source of price formation for bitcoin. The evidence suggests that perps are excellent at pricing demand but are blind to supply. A recent example of the influence of perps can be seen in the pricing of SpaceX's record $75 billion initial public offering, where perpetual futures contracts accurately predicted the company's first-day trading price, outperforming traditional Wall Street estimates. This demonstrates the growing importance of derivatives markets in price discovery, even in traditional assets.