The Dominance of Perpetual Futures in Crypto Markets and Beyond

The process of setting crypto prices is often misunderstood, with many believing it is determined by spot trading. However, for years, perpetual futures, also known as perpetual swaps or 'perps,' have played a significant role in bitcoin, ether, and the broader crypto markets. These contracts, which never expire, 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 daily funding rate. Research has shown that derivatives markets, particularly those for perpetual swaps on unregulated venues, are where new information enters the market first, leading to price discovery. For instance, a study found that perpetual swaps were the strongest instruments for bitcoin price discovery, with regulated futures and U.S. spot exchanges reacting to these moves rather than leading them. Other work has identified Binance's perpetual market as the primary source of price formation across the fragmented crypto landscape. While the evidence is not conclusive, with some studies finding that spot markets still lead at certain frequencies or during stress, the direction of the literature points towards the derivatives market as the primary place where prices are made. Historically, perps have led mostly during bear market price rallies. For example, Bitcoin perps demand growth led the price rallies of January 2026 and April-May 2026, despite spot demand contracting during these periods. The funding rate, which is paid by the more crowded side of the trade every few hours, serves as a tether that keeps the contract price anchored to the underlying price and provides a live readout of sentiment. Some traders closely watch the funding rate, as it can indicate market sentiment. However, others view it as merely a cost that eats into their profit and loss while they wait for their directional positions to become profitable. The influence of perps extends beyond crypto markets, as seen in the case of SpaceX's initial public offering (IPO). For about three weeks, traders were buying and selling exposure to SpaceX through pre-IPO perpetual futures on various exchanges, including Binance, Coinbase, and Hyperliquid. These contracts were structured to track an implied valuation rather than a share price. Notably, the perpetuals on Hyperliquid and Binance were quoting the equivalent of roughly $170 a share on the night before SpaceX listed, well above the $135 IPO price set by underwriters. The next day, SpaceX's stock opened at $161, up 19%, and reached an intraday high above $176, closely matching the price predicted by the perpetuals. This accuracy demonstrates the ability of the derivatives market to read demand more accurately than traditional banking institutions. However, the perpetual market's limitation in pricing supply was revealed as SpaceX's stock fell more than 40% from its June peak, due to the availability of only a sliver of shares at the IPO and the subsequent unlocking of insider shares. This example highlights the derivatives market's increasing role in price discovery, with spot markets following. Perps excel at pricing demand but are blind to supply, a crucial consideration during bitcoin rallies or flushes that start in the funding rate before reaching the spot market.