How Perpetual Futures Dominate Bitcoin and Ether Markets, and What SpaceX Taught Us

The process of setting cryptocurrency prices is often misunderstood, with many believing it involves spot trading where buyers and sellers meet on an exchange. However, for bitcoin, ether, and the broader crypto market, perpetual futures, also known as perpetual swaps or 'perps', have become the primary driver of price discovery, accounting for roughly 93% of all crypto futures volume. These contracts are leverage-friendly, never expire, and 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 U.S. spot exchanges reacting to, rather than leading, these moves. The evidence, while not conclusive, points towards the derivatives market as the place where prices are made, with spot markets following. 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 asset and serves as a live readout of market sentiment. This phenomenon was recently observed in the pre-IPO trading of SpaceX, where perpetual futures contracts accurately predicted the company's first-day trading price, outperforming traditional Wall Street predictions. The success of these contracts in pricing demand, however, also highlights their limitation in accounting for supply, as seen in the subsequent price drop of SpaceX shares after the IPO. The influence of perpetual futures on cryptocurrency markets and their ability to predict prices, as demonstrated by the SpaceX example, underscores the significant role these contracts play in the financial ecosystem.