How Perpetual Futures Dominate Bitcoin and Ether Markets, as Seen in SpaceX's IPO

The process of setting crypto prices is often misunderstood, with many believing it is determined 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 dominant force in the crypto market, accounting for roughly 93% of all crypto futures volume. These contracts are leverage-friendly, never expire, and can be held indefinitely by 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 US 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 illustrated by the pricing of SpaceX's IPO, where perpetual futures contracts on crypto exchanges accurately predicted the company's valuation, outperforming traditional Wall Street investors. The funding rate, which is the cost of holding a perpetual contract, plays a crucial role in keeping the contract price anchored to the underlying asset and serves as a live readout of market sentiment. Traders closely watch the funding rate, as it provides valuable insights into market dynamics. The influence of perpetual futures extends beyond the crypto market, as seen in the SpaceX IPO, where crypto traders were able to more accurately predict the company's valuation than traditional investors. This highlights the growing importance of perpetual futures in price discovery and their potential to disrupt traditional markets. The success of perpetual futures in predicting the SpaceX IPO valuation demonstrates their ability to price demand accurately, but also reveals their limitations in accounting for supply. As the crypto market continues to evolve, the role of perpetual futures is likely to remain a key factor in shaping price discovery and market dynamics.