The Dominance of Perpetual Futures in Crypto Markets and Beyond

The process of setting crypto prices is often misunderstood, with many believing it is driven by spot trading. However, perpetual futures, also known as perpetual swaps or 'perps,' have become the dominant force in the crypto market, accounting for around 93% of all crypto futures volume. These contracts, which never expire, allow for leverage-friendly trading and are settled through 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, rather than leading, these moves. The evidence suggests that the derivatives market is where prices are made, with spot markets following. This phenomenon is not limited to crypto, as seen in the case of SpaceX's IPO, where perpetual futures contracts accurately predicted the company's stock price before it began trading. The funding rate, which is used to settle perpetual contracts, is a key indicator of market sentiment and is closely watched by traders. While the funding rate provides valuable insights, it can also be a source of uncertainty for traders holding directional positions. The use of perpetual futures contracts in the SpaceX IPO demonstrated their ability to accurately price demand, but also highlighted their limitations in accounting for supply. As the crypto market continues to evolve, the role of perpetual futures in driving price discovery is likely to remain a key factor.