Cryptocurrency Markets Are Dominated by Perpetual Futures, As Evidenced by SpaceX's IPO

The process of setting crypto prices is often misunderstood, with many believing it to be 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 become the primary driver of price discovery in the crypto market. These contracts, which never expire, allow for leverage and have been shown to account for roughly 93% of all crypto futures volume. A study in the Journal of Financial Markets found that perpetual swaps on unregulated venues were the strongest instruments for bitcoin price discovery, with regulated futures and U.S. 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 was recently demonstrated in the lead-up to SpaceX's record $75 billion initial public offering, where perpetual futures contracts accurately predicted the company's share price, outperforming traditional Wall Street predictions. The funding rate, which is the cost of holding a perpetual contract, plays a crucial role in this process, as it reflects the sentiment of the market and can influence price movements. While the spot market still has a role to play, the dominance of perpetual futures in driving price discovery is a key factor in understanding the crypto market.