The Dominance of Perpetual Futures in Crypto Markets 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 primary driver of price discovery in the crypto market. These contracts, which never expire, account for roughly 93% of all crypto futures volume and have been shown to lead price movements in bitcoin and ether. Research has consistently pointed to derivatives markets, particularly perpetual swaps, as the primary source of price formation. The influence of perps can be seen in the pricing of private companies, such as SpaceX, which was accurately valued by perpetual futures contracts before its initial public offering. The derivatives market's ability to price demand, but not supply, is a key factor in its influence on price discovery. This is evident in the fact that perps can become disconnected from spot prices, leading to funding rate payments between traders. The use of perps in pricing private companies like SpaceX highlights their potential to disrupt traditional valuation methods. As the crypto market continues to evolve, the role of perps in driving price discovery is likely to remain a key factor. The funding rate, which is used to keep perp prices anchored to spot prices, is also an important indicator of market sentiment. Traders closely watch the funding rate, as it can provide insight into the direction of the market. The success of perps in pricing SpaceX's valuation before its IPO demonstrates the potential for these contracts to be used in other areas, such as traditional finance. However, the limitations of perps, particularly their inability to account for supply, must be considered when using them for price discovery. Overall, the dominance of perps in crypto markets is a significant development that is likely to have far-reaching implications for the financial industry.