How Perpetual Futures Dominate Bitcoin and Ether Markets, and the Surprising Lesson from SpaceX

The process of setting crypto prices is often misunderstood, with many believing it occurs through spot trading on exchanges. However, perpetual futures, also known as perpetual swaps or 'perps', have become the primary drivers of price discovery in the crypto markets, including bitcoin and ether. These contracts, which never expire, account for roughly 93% of all crypto futures volume, with daily volumes often surpassing those of the underlying spot markets. Perpetual futures allow traders to buy and sell contracts that track the price of an asset without an expiration date, providing a leverage-friendly way to speculate on price movements. The funding rate, a periodic payment made between long and short traders, helps keep the contract price in line with the underlying asset. Research has shown that perpetual futures on unregulated venues are often the first to reflect new information in the market, leading to price movements in the spot market. For example, a study found that perpetual swaps on unregulated venues were the strongest instruments for bitcoin price discovery. Another study identified Binance's perpetual market as the primary source of price formation across the fragmented crypto landscape. The evidence is not conclusive, but the trend suggests that derivatives markets are increasingly driving price discovery. Recently, the use of perpetual futures to predict the price of SpaceX's initial public offering (IPO) demonstrated the power of these contracts. Traders on various exchanges, including Binance and Hyperliquid, were able to buy and sell exposure to SpaceX's valuation through pre-IPO perpetual futures, which accurately predicted the company's first-day trading price. The success of these contracts in predicting the IPO price highlights the importance of perpetual futures in driving price discovery, even in traditional markets. However, it also reveals their limitations, as they are blind to supply-side factors that can impact prices. As the crypto markets continue to evolve, the role of perpetual futures in driving price discovery is likely to remain a key area of focus for traders and researchers alike.