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 involves spot trading, where buyers and sellers meet on an exchange. However, perpetual futures, also known as perpetual swaps or 'perps,' have become the dominant force in the crypto market, accounting for approximately 93% of all crypto futures volume. These contracts, which never expire, allow traders to buy and sell with leverage, and their prices are determined by the funding rate, which 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 SpaceX IPO, where perpetual futures contracts accurately predicted the stock's initial price, outperforming traditional market predictions. The funding rate, which is the cost of holding a perpetual contract, plays a crucial role in this process, as it reflects market sentiment and influences price movements. Traders closely watch the funding rate, as it provides a live readout of market sentiment, and some even rely on it to inform their trading decisions. The success of perpetual futures in predicting the SpaceX IPO price demonstrates their effectiveness in pricing demand, but also highlights their limitations in accounting for supply. As the crypto market continues to evolve, it is likely that perpetual futures will remain a key driver of price discovery, with spot markets reacting to their lead.