The Dominance of Perpetual Futures in Bitcoin and Ether Markets

Most people believe that cryptocurrency prices are determined by spot trading, where buyers and sellers meet on an exchange. However, this has not been the case for years, especially for bitcoin and ether. Perpetual futures, also known as perpetual swaps or 'perps,' are contracts that never expire and are highly leveraged, accounting for approximately 93% of all crypto futures volume. These contracts can 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 US spot exchanges reacting to these moves rather than leading them. A study found that Binance's perpetual market is the primary source of price formation across the fragmented crypto landscape. While the evidence is not conclusive, and some studies suggest that spot markets still lead at certain frequencies or during times of stress, the overall direction of the literature points to the derivatives market as the primary driver of price discovery. Historically, perpetual futures have led price rallies during bear markets. For example, Bitcoin perps demand growth led the price rallies of January 2026 and April-May 2026, despite spot demand contracting. The funding rate, which is paid by the crowded side of the trade every few hours, acts as a tether that keeps the contract price anchored to the underlying price and provides a live readout of market sentiment. Some traders closely watch the funding rate, while others see it as just another data point to interpret. The use case of SpaceX, which had a record $75 billion initial public offering, demonstrates the power of perpetual futures in price discovery. Traders on Binance, Coinbase, and other platforms were buying and selling exposure to SpaceX through pre-IPO perpetual futures, which accurately predicted the company's first-day trading price. The perpetual market was pricing SpaceX well above the $135 IPO price, allowing traders to bet on the gap between the perp and the eventual opening price. However, the perpetual market is blind to supply, which became a significant factor in SpaceX's stock price after the IPO. The company's shares fell more than 40% from their June peak, dropping from the $135 IPO price to around $115, due to the release of locked-up insider shares. This example illustrates the increasing influence of the derivatives market in price discovery, where spot markets follow.