Bitcoin Perpetuals set to become an even bigger price driver

Bitcoin perpetual futures, one of the most popular derivative contracts in crypto markets, are increasingly driving the price of the largest digital token.

That’s according to Conor Ryder, research analyst at Kaiko, who points out that the Bitcoin perpetuals-to-spot volume ratio is at its highest in almost two years. Perps, as they are sometimes known in industry parlance, do not expire and have been hugely popular with traders as the derivatives market is a place where a lot of speculation can occur, according to the researcher.

“It is a matter of price discovery, ie where the true price of an asset is actually determined. It’s historically correlated with volumes, so wherever the majority of volumes are, the more influence it has on the price, Ryder said. “Perps have a larger share of volumes compared to spot, and the theory is that more and more price discovery is happening in perp markets, with long/short pressure having more influence on prices.”

The perpetual contract was first introduced by crypto exchange BitMEX in 2016. Exchanges use the so-called funding rate – or trading cost – to link the contracts to their underlying spot price. When the rate is positive, those with long positions pay interest to investors who are short, and vice versa.

When Binance, the largest exchange, introduced fee-free trading for certain trading pairs last year, spot volumes shot higher. However, volumes have fallen since the company decided to do away with the majority of the program. Meanwhile, perpetuals futures have commanded more of the market, seeing six times the volumes compared to spot markets, Ryder estimates.

As an example of how derivatives can be a force on prices, Kaiko points to a “huge” buildup of nearly $2 billion in open interest for Bitcoin futures in mid-April. It came amid positive funding rates.

“We can conclude that speculative long positions drove this rally and the positive price action appeared to peak as soon as funding rates turned negative,” Ryder said. Meanwhile, he also points to trends in the options market – every peak in April was dominated by calls, sometimes hitting 70% of volumes. Call options give the buyer of the contracts the right to buy an asset at a set price within a set time period.

“As of today, the share is around 60%,” he said, “indicating continued bullish sentiment among options investors.”