Preface
The true protagonist of this bull market is the perpetual contract (Perps) – a massive, highly leveraged PVP arena driven by intense battles between longs and shorts. The liquidity, narratives, and wealth effects here are defining the entire market in an unprecedented way.
This article explores why liquidity is historically concentrated in the derivatives market and uses an MXY case study to reveal the core mechanism of how “short squeezes” become rocket fuel, driving asset prices upwards in a spiral.
I. Data Comparison
First, let’s verify an astonishing fact through data: perpetual contract trading volume has completely surpassed the spot market.
- Trading Volume Comparison: According to data platforms like TokenInsight in Q2 2025, the trading volume of crypto derivatives (primarily perpetual contracts) on major exchanges is typically 10 to 15 times that of the spot market. This means when the spot market has $10 billion in trading volume, the derivatives market could already have $100 to $150 billion.
- Open Interest (OI): Observing the open interest for major coins like BTC and ETH, as well as popular new tokens, we see its scale far exceeds the spot inventory of the corresponding tokens on exchanges. This indicates that the vast majority of market participants have their risk exposure and capital deployed on the derivatives side.
- Funding Rate: For most of this bull market, funding rates have remained positive and high. This attracts a large number of “arbitrageurs” who employ a “short perpetual contracts + buy an equivalent amount of spot” strategy to earn the stable funding rate. This activity further drains liquidity from the spot market and locks it into hedging positions.
We can simply conclude that actually 99% of players in the crypto space are engaged in contract trading, but most don’t realize that contract trading itself does not directly impact the current price direction. In other words, contracts are essentially gambling, betting on whether the market will go up or down based on its current trend. Such large trading volume does not inherently affect the current price trend. Spot trading, on the other hand, is the opposite – large trading volume often directly impacts the current price trend. Trading perpetual contracts is like gamblers on the sidelines betting on the outcome of the battle between longs and shorts.
Unveiling the Core Mechanism: How is the “Squeeze Rocket” Launched?
The market’s “bizarre phenomenon” – price increases often don’t start with spot buying but are driven by liquidations on the contract side. So, as I said above, contract trading itself doesn’t cause price fluctuations. Then why do we often hear phrases like “thanks for the fuel, bears” or “liquidations causing pumps” in the market? This tells us that contract liquidations can trigger certain market behaviors. The essence is that market makers impacting prices through their necessary spot hedging. Let’s break it down.
Case Study: MXY
- Background:
- MXY is a popular new project with an extremely low initial circulating supply.
- Exchanges list MXY’s USDT-margined perpetual contract.
- Current spot price: $0.06.
- Utilizing a mechanism where the exchange’s price oracle (e.g., Binance Alpha) draws data from other smaller exchanges, a market maker/actor executes large buy orders quickly on a small exchange with weak liquidity, rapidly pushing the price up tenfold. At this point, many users, thinking such a rapid rise must be followed by a fast drop, accumulate significant short positions. When the price reaches around $6, many of these short positions have liquidation prices around $8.
Launch Sequence:
- Initial Ignition: The project team injects a small amount of capital into the spot market, forcibly pushing the spot price from $6 to $8. Due to the low circulating supply (thin order book), the cost of this pump is very low.
- First Stage Separation (First Round of Liquidations): The MXY price touches $8, triggering the forced liquidation (i.e.,爆仓 bàocāng) of the first batch of short positions set around this price. Assume these positions are worth $1 million.
- Liquidation Mechanism: The act of “closing a short position” is a BUY order. The liquidation engine needs to immediately BUY $1 million worth of MXY contracts on the market.
- Market Maker Hedging: The market makers providing liquidity to the liquidation engine, upon selling these contracts, immediately go to the spot market to BUY an equivalent amount of MXY spot to hedge their resulting naked short risk.
- Price Feedback: This spot buy order from the market makers further pushes up the already thin spot price, for example, from $8 to $10.
- Second Stage Ignition (Cascade Liquidations): The spot price reaching $10 triggers a new, larger batch of short position liquidations. This process perfectly repeats Step 2: Contract liquidations -> Market makers buy spot to hedge -> Spot price increases further.
- Reaching Orbit: This cycle repeats, creating a positive liquidation spiral. Each layer of short liquidations becomes fuel for the next price increase, pushing the MXY price from $8 up to $15 or even higher. In this process, the initial “ignition” capital leveraged millions of dollars in passive buying pressure.
Conclusion
Perpetual contracts’ high leverage brings the potential for high returns but also carries significant risks. We hope everyone can survive long and make money in the crypto market.
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