The Dominance of Perpetual Futures in Crypto Markets and Beyond

The process of setting crypto prices is often misunderstood, with many believing it occurs through spot trading. However, perpetual futures, also known as perpetual swaps or 'perps,' have become the dominant force in determining prices for bitcoin, ether, and other cryptocurrencies. These contracts, which never expire, account for approximately 93% of all crypto futures volume and often have a daily volume that surpasses the underlying spot market. Unlike traditional futures contracts, which have a settlement date and are forced to converge with the spot price, perpetual futures can be held indefinitely, with traders 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 spot exchanges reacting to these moves. The evidence suggests that the derivatives market is where prices are made, with spot markets following. This phenomenon was recently observed in the case of SpaceX's initial public offering, where perpetual futures contracts accurately predicted the company's stock price before it began trading. The success of these contracts in pricing demand, albeit with a blind spot for supply, highlights the growing influence of perpetual futures in the world of finance. As the crypto market continues to evolve, it is essential to understand the role of perpetual futures in shaping prices and the potential implications for investors and traders alike.