How a Hong Kong Hike Revolutionized Crypto Trading Forever

In 2015, a hike in Hong Kong's countryside led to the creation of the perpetual swap, also known as a perpetual future or 'perp' for short. Ben Delo, BitMEX's co-founder and a mathematician, was on a hike with his friend Bavik, a derivatives trader, when he was struggling to solve a problem that had been bothering him for months. BitMEX had tried various approaches, including quarterly, monthly, weekly, and even 24-hour futures contracts, but none of them worked as customers kept complaining about their positions closing unexpectedly. They wanted a product that resembled spot trading but offered the leverage of a derivatives exchange. Delo asked, 'What if a future never expired?' Bavik's response was that it would be worth infinity from a mathematical perspective, but then suggested charging traders the bitcoin overnight rate. However, Delo pointed out that such a rate did not exist at the time. Delo decided to create it, which led to the invention of one of the most significant financial products of the 21st century. To understand the impact of the perpetual swap, it's essential to consider what BitMEX was trying to achieve before it became the most liquid bitcoin market in the world. When Delo and Arthur Hayes founded the exchange in 2014, they focused on institutional hedgers, not retail traders. Hayes had worked at Deutsche Bank, and Delo had built high-frequency trading systems at JP Morgan. Their goal was to provide a professional infrastructure for bitcoin miners and payment companies to hedge their exposure. However, the institutions never came, and instead, sophisticated retail traders arrived, seeking to speculate with high leverage. BitMEX listened and began offering 100x leverage by Halloween 2015, made possible by a real-time margining system that Delo had built from scratch. The issue with futures contracts, even short-dated ones, was the basis, or the premium at which a futures contract trades above the spot price of the underlying asset. In traditional finance, this is well understood, but in crypto, in 2015, it confused almost everyone. Customers would ask why bitcoin was so expensive on the exchange, and BitMEX would explain that it was due to the implied interest rate. The solution to this problem was the perpetual swap, which launched in May 2016 with a straightforward core mechanic: a futures contract with no expiry date, anchored to the spot price through a daily funding rate. Longs paid shorts, or vice versa, depending on whether the swap was trading above or below spot. The early funding rate was derived from third-party lending markets, but it eventually became dynamic, looking inward at how the swap was trading rather than outward at other markets. This approach allowed BitMEX to measure how far the swap was trading above or below spot over an eight-hour window, treating that gap as an implied basis, and back-calculating the annualized rate from it. This funding rate mechanism is now used by every major derivatives exchange in the world. By 2017, BitMEX was the most liquid bitcoin market, processing $3-4 billion a day, with the perpetual swap at its center. The concentration of liquidity was a result of the swap's design, which collapsed multiple contracts into one instrument. Competitors noticed, and eventually, every major exchange in crypto offered its own perpetual swap. Delo believes that the fact that every other exchange has copied the swap proves its value as a financial innovation. He estimates that it now generates $40-50 trillion in turnover annually, making it one of the most successful products in the history of capitalism. BitMEX chose not to patent the perpetual swap, and now, a decade later, the product is attracting the attention of traditional finance regulators. The CFTC is reportedly making room for perpetual swaps under its framework, and there is speculation that the CME could eventually list them on equities. For Delo, this prospect is the final validation of something that started as a question on a hillside above Hong Kong, asked by someone who had grown tired of watching his customers complain about positions that kept disappearing.