The Dominance of Perpetual Futures in Crypto Markets and Beyond

The process of setting crypto prices is often misunderstood, with many believing it involves spot trading where buyers and sellers meet on an exchange. However, perpetual futures, also known as perpetual swaps or 'perps,' have become the dominant force in crypto markets, 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 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 initial public offering, where perpetual futures contracts accurately predicted the company's valuation before it began trading on the Nasdaq. The use of perpetual futures in pricing SpaceX's valuation highlights the ability of these contracts to price demand but not supply, a key consideration in understanding their influence on markets. The funding rate, which is used to keep perpetual contracts anchored to the underlying price, is also a crucial indicator of market sentiment, closely watched by traders. As the crypto market continues to evolve, the role of perpetual futures in driving price discovery is likely to remain a significant factor, with implications for traders, investors, and the broader financial landscape.