The Dominance of Perpetual Futures in Crypto 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 perps, have become the dominant force in crypto markets, accounting for around 93% of all crypto futures volume. These contracts, which never expire, allow for leverage and are traded on various exchanges, including unregulated venues. Research has shown that perps are the primary source of price formation, with spot markets reacting to changes in the derivatives market. The funding rate, which is the cost of holding a perp position, plays a crucial role in maintaining the contract's price and is closely watched by traders. A recent example of the power of perps is the pricing of SpaceX's initial public offering, where traders on crypto exchanges were able to accurately predict the company's valuation before it listed on the Nasdaq. This demonstrates the ability of perps to price demand, but also highlights their limitations in accounting for supply. As the crypto market continues to evolve, the influence of perps is likely to remain significant, with spot markets following their lead.