Perpetual Futures Dominate Bitcoin and Ether Markets, Influencing Price Discovery

The mechanism of setting crypto prices is often misunderstood, with many believing it is driven by spot trading. However, perpetual futures, also known as perps, have become the primary driver of price discovery for bitcoin, ether, and the broader crypto market. Perps are leverage-friendly contracts that never expire and account for roughly 93% of all crypto futures volume. Research has shown that perps on unregulated venues are the strongest instruments for bitcoin price discovery, with regulated futures and US spot exchanges reacting to these moves. A study found that Binance's perpetual market is the primary source of price formation across the fragmented crypto landscape. The evidence suggests that the derivatives market is where the price is made, with spot markets following. The funding rate, which is the cost of holding a perp position, plays a crucial role in keeping the contract price anchored to the underlying asset and is a live readout of market sentiment. The use case of SpaceX's pre-IPO perpetual futures market demonstrates the accuracy of perps in pricing demand, but also highlights their limitations in accounting for supply. The derivatives market's influence on price discovery is increasingly evident, with perps leading the way in ordinary crypto trading.