How Perpetual Futures Dominate Bitcoin and Ether Markets, and What SpaceX Taught Us

The process of setting crypto prices is often misunderstood, with many believing it occurs through spot trading on exchanges. However, perpetual futures, or 'perps,' have become the primary driver of price discovery in the crypto market, accounting for roughly 93% of all crypto futures volume. These contracts, which can be held indefinitely, allow for leverage and are settled through a funding rate that varies daily. Studies have shown that perpetual swaps on unregulated venues are the strongest instruments for bitcoin price discovery, with regulated futures and U.S. spot exchanges reacting to these moves. The evidence suggests that the derivatives market is where the price is made, with spot markets following. This phenomenon was also observed in the pre-IPO trading of SpaceX, where perpetual futures contracts accurately predicted the company's first-day stock price. The funding rate, which is used to keep the perpetual contract price anchored to the underlying spot price, is also a key indicator of market sentiment. Traders watch the funding rate closely, as it provides a live readout of sentiment and can be used to gauge the direction of the market. The use of perpetual futures in pricing SpaceX's pre-IPO valuation demonstrates the power of derivatives markets in price discovery, even in traditional assets. The accuracy of these contracts in predicting the stock's first-day price highlights the importance of the derivatives market in setting prices. However, the subsequent decline in SpaceX's stock price due to supply-side factors also illustrates the limitations of perpetual futures in pricing assets, as they are blind to supply-side factors.