The Dominance of Perpetual Futures in Crypto Markets and Beyond

The process of determining crypto prices is often misunderstood, with many believing it is driven by spot trading, where buyers and sellers meet on an exchange. However, the reality is that perpetual futures, also known as perpetual swaps or 'perps,' have been the dominant force in crypto markets for years, accounting for roughly 93% of all crypto futures volume. These leverage-friendly contracts never expire and can be held indefinitely, with the 'funding rate' varying 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, rather than leading, these moves. The evidence suggests that derivatives markets are where prices are made, with spot markets following. This phenomenon was recently demonstrated in the SpaceX IPO, where perpetual futures contracts accurately predicted the company's stock price, outperforming traditional Wall Street predictions. The perpetual market's ability to price demand, but not supply, is a key factor in its influence, and its impact is felt not only in crypto markets but also in other areas, such as the pricing of private companies. As the crypto market continues to evolve, the role of perpetual futures is likely to remain a significant factor in determining prices.