Crypto Ch7: Market Structure

Chapter 7. Market structure: spot, perpetuals, leverage, and price formation

7.1 CEX vs DEX

Centralized exchanges (CEXs)

Typically offer:

• Faster matching
• Deeper order books
• Lower friction for active traders
• Easier fiat on/off ramps
• Better support for high-frequency and derivatives trading

Decentralized exchanges (DEXs)

Typically offer:

• Self-custody
• Permissionless access
• Composability with on-chain protocols
• Wider access to long-tail assets

7.2 Spot vs derivatives

Spot

You buy the asset itself.

Derivatives / contracts

You buy price exposure rather than necessarily taking delivery of the asset.

A derivative is best understood as a financial position whose value depends on the price of something else.

7.3 Price exposure

Exposure means your profit and loss depend on how a referenced asset moves, even if you do not directly hold that asset.

This is one of the most important mental distinctions in market structure. A trader can have ETH exposure without holding ETH on-chain.

7.4 Futures and perpetuals

Traditional futures

Have an expiry date. At expiry, positions settle.

Perpetual futures

Have no expiry date. Instead, they rely on funding to keep contract prices tied to spot markets.

7.5 Funding rate

Funding is a periodic payment between longs and shorts.

Its role is to pull perpetual prices back toward spot prices by making the overcrowded side pay the other side.

Funding is not the same thing as a trading fee. It is a balancing mechanism for a no-expiry derivative market.

7.6 Leverage

Leverage allows a trader to control a larger notional position with a smaller amount of capital (margin).

This magnifies both gains and losses.

The key idea is that P&L is computed on the full position size, not just on the amount of capital posted.

7.7 Liquidation in leveraged markets

If losses approach or exceed the trader’s available margin, the position can be forcibly closed.

In fast markets, liquidation can create cascades.

The reason is simple: forced closing itself becomes market flow, which can worsen price moves and trigger more forced closes.

7.8 Why crypto is especially prone to violent moves

Crypto markets combine:

• High leverage
• Thin liquidity in many assets
• Fast-moving narratives
• 24/7 trading
• Tight coupling between spot and derivatives markets

This creates feedback loops such as:

• Price moves
• Liquidations
• Forced market orders
• Further price moves

7.9 Market makers

Market makers continuously quote buy and sell prices.

They provide liquidity and typically earn through:

• Bid/ask spread capture
• Rebates or incentives
• Inventory management and cross-venue hedging

They are not simply “free money machines”; they are continuously managing inventory and adverse selection risk.

7.10 Narrative in crypto markets

Many crypto assets are not anchored by mature cash-flow frameworks. As a result, narratives can directly affect attention, flows, and valuations.

Narrative matters because valuation in crypto often includes strong forward-looking optionality rather than only present cash-flow expectations.

Key takeaway

Crypto prices are not shaped by fundamentals alone. Market structure, leverage, liquidity depth, derivatives positioning, and narrative feedback loops all matter.

— Mar 26, 2026

Crypto Ch7: Market Structure by Lu Meng is licensed under a Creative Commons Attribution-NonCommercial-ShareAlike 4.0 International License. Permissions beyond the scope of this license may be available at About.