According to Tan Phat Digital's in-depth observations, the cryptocurrency market has undergone a revolution in financial structure, shifting from a model focused on spot transactions to a complex ecosystem dominated by derivatives. The rise of futures contracts, options and especially perpetual futures not only provide risk prevention tools but also become the main driving force in establishing price levels and regulating liquidity globally. The current derivatives market acts as an amplification system, where financial leverage and speculative psychology create huge buying and selling impulses, forcing spot prices to adjust through intermediary mechanisms such as arbitrage, market makers' activities and liquidation cascades.
Price discovery mechanism and the leading role of derivatives
Price discovery is the central process of every financial market where new information is incorporated into asset prices through the interaction of supply and demand. In the Bitcoin and major digital asset markets, empirical evidence shows that derivatives markets frequently lead this process, far exceeding the influence of traditional spot exchanges.
The lead-lag relationship between derivatives and spot
Quantitative analysis of the lead-lag relationship indicates that the derivatives market, especially futures contracts and perpetual swaps on exchanges Large exchanges such as Binance, OKX and Bybit, are often ahead of spot prices in reacting to new information. Capital efficiency is the main reason for this lead; traders can express their views on the market (bullish or bearish) at a much lower cost through leverage, instead of directly owning the underlying asset.
Microstructure research on tick-level data shows that large price movements often appear on derivatives exchanges before spreading to spot exchanges. However, a subtle point in this structure is the distinction between direction and intensity: while the spot market is often the place to indicate the basic direction of price (direction), the derivatives market is the place to determine the intensity and speed of fluctuations (magnitude).
Characteristics of comparison between the two markets:
Spot Market:
Functions main: Asset ownership, payment.
Price discovery role: Direction indicator.
Participation cost: High (100% of asset value).
Liquidity impact: Creating a stable price foundation.
Leading mechanism: Real, cumulative cash flow Accumulated.
Derivatives Market:
Main function: Risk prevention, speculation.
Price discovery role: Magnitude indicator.
Participation cost: Low (Margin from 1-10%).
Impact liquidity: Create volatility and virtual liquidity.
Driver mechanism: Leverage, short-term psychology.
Impact of introducing institutional derivatives
The launch of Bitcoin futures on CME in December 2017 was an important milestone that demonstrated the influence of derivatives on spot prices. Before this time, the Bitcoin spot market was highly fragmented with large price differences between geographical areas. The introduction of mainstream derivatives has significantly increased cross-exchange price synchronicity.
This mechanism works by reducing trading barriers such as short selling restrictions and block confirmation time risks. When institutional investors are able to effectively execute hedging and short selling strategies, spot prices are forced to converge to more reasonable prices, reducing long-term arbitrage opportunities and increasing market efficiency. Empirical evidence shows that the emergence of futures has led to a decline in long-term volatility by making prices more "information-rich", although it may have exacerbated short-term volatility due to leverage.
Perpetual swaps and funding rates: The price anchor
Perpetual Swaps/Futures are the most popular derivatives in crypto because they have no expiration date, allowing investors to maintain positions indefinitely. To ensure that derivative prices do not separate too far from the spot price, the Funding Rate mechanism acts as a regulatory "invisible hand".
Funding Rate mechanism
Funding Rate is a periodic payment exchanged directly between Long and Short sides. This ratio is calculated based on the difference between the price of the perpetual contract (Mark Price) and the price of the underlying asset on the spot market (Index Price).
When Funding Rate is positive: The derivative price is higher than the spot price (market excitement). The Long side has to pay the Short side, creating costs to maintain an up position and encouraging the opening of a down position, thereby pulling the derivative price down close to the spot price.
When Funding Rate is negative: The derivative price is lower than the spot price (market panic). The Short side must pay the Long side, encouraging investors to buy derivatives and close their selling positions, helping to push the price back up.
This mechanism directly affects the spot price through arbitrage activities. When the Funding Rate is highly positive, traders implement the "Cash and Carry" strategy: buying spot assets and shorting perpetual contracts to collect funding fees. This spot buying force directly pushes up the spot price, ensuring price convergence between the two markets.
Constituents
The Premium component is determined by taking the time-weighted average price (TWAP) of the difference between the derivative and spot over a certain period of time (usually 1 hour or 8 hours). Applying caps/floors and smoothing factors helps prevent excessive volatility in funding fees, while maintaining steady economic pressure so that spot and derivative prices never stray too far apart.
See also: Bull Market vs Bear Market
Forced liquidation and negative feedback loops (Liquidation Cascades)
The liquidation mechanism is the fatal weakness of the leverage system and is also the most powerful way that derivatives impact spot prices during periods of extreme volatility. When a leveraged position falls below the maintenance margin, the exchange's automated system will execute a market sell (or buy) order to close the position.
Cascading Process
A "liquidation loop" occurs when these automated sell orders push the price lower, thereby triggering more new liquidations at even lower prices. Tan Phat Digital analyzes this process through the steps:
Trigger: An external shock (macro news or large sell order) pushes the price down to a sensitive level.
Market order: The highest leveraged positions are liquidated first. Market sell orders from exchanges consume liquidity from the spot order book.
Liquidity black hole: During flash crashes, order book depth can decrease by up to 98%, causing even a small amount of sell orders to cause prices to freefall by thousands of dollars.
Spillover: Spot price declines due to derivative liquidation cause panic among traders. spot investors, leading to a wave of chain sell-offs.
Data from the October-November 2025 crash demonstrates this devastation: 8.55 billion USD was liquidated in 57 days, of which 2.28 billion USD was wiped out in just one day (October 10), pushing Bitcoin price down 24.4%. During the peak moments of the cascade, the liquidation speed can reach more than 10 billion USD per hour, 86 times faster than the average.
Typical liquidation events:
May 2021: Total liquidation value is more than 10 billion USD, causing Bitcoin to plummet from 60,000 USD to 30,000 USD USD.
October 2025 (Purge Event): Total liquidation 8.55 billion USD, Bitcoin down 24.4% in a few weeks.
March 2025 (Flash Event): Total liquidation 436 million USD in just 1 hour, Bitcoin down 7.2% in 60 minutes.
March 2020 (Covid Event): Total liquidation of billions of USD, Bitcoin decreased by more than 50% in just a few hours.
See more: What is Liquidity
Delta risk prevention and market maker behavior
Market Makers - MMs) plays a role in providing liquidity but is also an indirect agent that pushes spot prices through forced hedging strategies (Hedging).
Delta Hedging and resonance effects
Delta measures the sensitivity of option prices compared to the underlying asset price. When an MM sells a Call Option to a customer, they are in a "Short Delta" (negative) state. If the price of Bitcoin increases, the loss from this Short Call position increases. To maintain a neutral state (Delta-neutral), MM is forced to buy Bitcoin on the spot market to compensate.
This action creates a positive feedback loop: The price increase leads to MM having to buy more spot to hedge, from there the price increases further and MM has to buy again. This phenomenon, known as "Gamma Squeeze", can push spot prices unnaturally high over a short period of time. On the contrary, when prices fall, MMs have to sell off spot to hedge put option positions (Puts), exacerbating the downtrend.
Gamma and Pinning Effect
Gamma reflects the speed of change in Delta as asset prices move. At strike prices with large open interest volume, MMs often have to adjust their hedging positions extremely aggressively. This leads to the "Pinning" phenomenon, where the spot price tends to be pinned around a certain strike price when the expiration date is reached due to the reciprocal buying/selling activities of MMs to maintain a risk-neutral state.
Arbitrage and automated trading strategies
The phase difference between the derivatives market and the spot creates arbitrage opportunities, and these activities are the driving force to pull the prices of both sides to equilibrium. equal. Most price manipulation activities through arbitrage are performed by high-frequency robots (HFT):
Cash and Carry Arbitrage: When the Futures price is higher than the Spot price (Contango), the bot will buy spot and sell futures to lock in profits from the difference and funding fees. The buying force from this bot is an important source of demand for the spot market during bull cycles.
Reverse Cash and Carry: When the Futures price is lower than the Spot price (Backwardation), the bot will short the spot and buy futures. This creates supply pressure on the spot market, often seen in bear markets.
Market sentiment and derivatives indices
The derivatives market governs spot prices not only through cash flow but also through psychology. Spot investors often observe derivatives data to predict trends:
Open Interest (OI): Represents the amount of capital "in play". If price increases accompanied by increased OI, new money flows are reinforcing the trend. If price increases but OI decreases, it may be an unsustainable Short squeeze.
Long/Short Ratio: Reflects the distribution of the crowd. A Long/Short ratio that is too high (> 2.0) is often considered a contrarian indicator, signaling that the market is overheated and vulnerable to "liquidation sweeps".
Vietnam Market Context: Community and Derivatives Interaction
Vietnam is one of the countries with the highest cryptocurrency adoption rate in the world. Tan Phat Digital sees a clear division in domestic investor groups:
The "Degen" group: Fast profit goal, X many accounts; The main dominant instrument is high leverage derivatives (50x-125x).
The "Holders" group: Accumulate long-term assets; The dominant tools are Spot trading and Staking/Farming.
The "Farmers" group: Hunting for new projects and Airdrops; The dominant tools are DeFi and Liquid Staking Derivatives (LSDs).
General users: Save and fight inflation; often use domestic platforms such as ONUS (VNDC).
The introduction of the Digital Technology Industry Law in Vietnam (effective from 2026) marks the official legal recognition of digital assets. This is expected to attract traditional financial institutions to participate in the market, shifting derivatives from "pure speculation" to "professional risk management", stabilizing the relationship between spot prices and derivatives in the long term.
Frequently Asked Questions (FAQ)
1. What is the most important role that derivatives play in asset pricing?
Derivatives act as early indicators in the price discovery process, reflecting investor expectations and new information faster than the spot market thanks to high capital efficiency.
2. Why do perpetual derivative prices always follow spot prices? Thanks to the Funding Rate mechanism - a periodic payment between Long and Short sides to encourage contract prices to converge to the spot index price.
3. What actually is a "Liquidation Cascade"?It is a negative feedback loop where leveraged positions are forced to close (sell/buy the market), pushing the price further and triggering further liquidations.
4. How do Market Makers influence spot prices? They use the Delta Hedging strategy, forcing the purchase or sale of real assets in the spot market to maintain a risk-neutral state when providing liquidity for derivative products.
5. What does the Digital Technology Industry Law 2026 in Vietnam regulate about cryptocurrency?
The law officially recognizes digital assets as a type of asset according to the Civil Code, classifies them into crypto assets and virtual assets, and creates a legal framework for transactions and ownership.
6. After 2026, will crypto trading in Vietnam be completely legal?
Owning, investing and trading will be protected by law, however crypto is not recognized as a legal means of payment to buy goods and services.
7. How is the crypto transaction tax for individuals in Vietnam calculated?
It is expected that individuals will be subject to personal income tax at $0.1\%$ on the transfer value of each transaction, similar to the tax applied to current stock transactions.
8. How much damage did the October 2025 "Purge" liquidation event cause? This liquidation wiped out $8.55$ billion USD within 57 days, causing Bitcoin price to drop $24.4\%$ as high leverage positions were wiped out en masse.
9. How does Delta Hedging work?The trader will open a counter position (for example, short the spot while holding a call option) to neutralize the impact of changes in the underlying asset's price on the portfolio.
10. Why do derivatives often lead spot price trends?
Because the derivatives market allows the use of high leverage, attracting investors with information and large capital resources to take positions quickly at a lower cost than buying spot.
11. What does Open Interest (OI) increase with price signal?This shows that new money flows are actively entering the market to consolidate the current uptrend, adding strength to the upward momentum of spot prices.
12. Where do Flash Crashes in crypto usually originate? Usually originates from a combination of a news shock, thin liquidity and the triggering of a series of automatic liquidation orders on derivatives exchanges.
13. What are Liquid Staking Derivatives (LSDs)?These are derivative tokens that represent assets that are being staked (like stETH), allowing users to retain liquidity while the underlying asset is still generating returns from staking.
14. Can Vietnamese investors open accounts on licensed exchanges?
Yes, under the pilot program, both domestic and foreign investors are allowed to open trading accounts at licensed crypto asset service providers in Vietnam.
15. What are the conditions for an exchange to be licensed in Vietnam after 2026?
The exchange must be established in Vietnam, have a minimum charter capital of $10,000 billion VND (about $380 million USD) and comply with strict regulations on anti-money laundering.
The derivatives market is not just an auxiliary tool but has become the central nervous system of prices in the cryptocurrency world. According to Tan Phat Digital, this influence is two-sided: it both helps spot prices reflect information faster (effectiveness), and also creates liquidation loops that can wipe out capitalization in an instant (riskiness). Understanding this mechanism is a prerequisite for investors to successfully navigate a market driven by leverage and algorithms.
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