The Genesis of a Revolutionary Trading Concept: How a Hong Kong Hike Changed Cryptocurrency Trading Forever

The idea for the perpetual swap, also known as a perpetual future or 'perp' for short, was conceived in 2015 on a hiking trail in Hong Kong. Ben Delo, BitMEX co-founder and mathematician, was discussing a problem with a friend named Bavik, a derivatives trader, that had been troubling him for months. At the time, BitMEX had tried various approaches, including quarterly, monthly, weekly, and even 24-hour futures contracts, but none were successful. Customers complained about their positions being closed without warning, seeking a product that resembled spot trading but offered the leverage of a derivatives exchange. Delo posed a question: 'What if a future never expired?' Bavik's response was immediate: 'Mathematically, it would be worth infinity.' Although technically correct, as a futures contract's value is partly derived from its remaining time to expiry and the cost of carrying the position, removing the expiry date would make the theoretical value infinite. However, Bavik proposed a solution: charge traders the bitcoin overnight rate, similar to LIBOR in traditional finance. The problem was that such a rate did not exist at the time, prompting Delo to create it. This innovation led to the development 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 BitMEX's origins. Founded in 2014 by Delo and Arthur Hayes, the exchange initially targeted institutional hedgers, but it was retail traders who ultimately drove its growth. These traders sought high leverage and speculation opportunities, which BitMEX accommodated by introducing 100x leverage by Halloween 2015. The exchange's real-time margining system, built by Delo, enabled this capability. However, the issue of basis – the premium at which a futures contract trades above the spot price of the underlying asset – posed a challenge. In traditional finance, this concept is well understood, but in crypto, it caused confusion among traders in 2015. Delo recalled customers questioning why bitcoin prices were higher on the exchange, and his response was to suggest shorting the asset, a concept that was unfamiliar to many at the time. The perpetual swap, launched in May 2016, addressed these issues with a straightforward mechanism: 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, with BitMEX taking no cut. The early funding rate was derived from third-party lending markets, primarily Bitfinex, but this approach eventually became unsustainable as demand for long exposure on BitMEX increased. The swap started trading at a persistent premium to spot, causing the contract price to drift away from the actual bitcoin price. Delo adjusted the funding rate calculation to a dynamic approach, looking inward at the swap's trading activity rather than external lending markets. This solution, which measured the gap between the swap and spot prices over an eight-hour window, treated this gap as an implied basis, and back-calculated the annualized rate, proved elegant and effective. By giving market makers notice of the calculation and charging method, the mechanism created a dynamic equilibrium, where market makers would short the swap and anchor it back to the spot price. This funding rate mechanism is now used by every major derivatives exchange worldwide. The perpetual swap's impact was significant, with BitMEX becoming the most liquid bitcoin market by 2017, processing $3-4 billion daily. The concentration of liquidity was a direct result of the swap's design, which consolidated market maker capital into a single instrument. Competitors took notice, with some copying the product literally, while others built upon the concept. Today, every major exchange in crypto offers its own perpetual swap, each based on the funding rate architecture that Delo pioneered. Delo considers the fact that other exchanges have copied the swap as proof of its financial innovation, with the product now generating $40-50 trillion in annual turnover, making it one of the most successful in the history of capitalism. Looking ahead, traditional finance regulators are taking notice of the perpetual swap, with the CFTC reportedly making room for it under its framework, and speculation that the CME could list it on equities. For Delo, this prospect is the final validation of an idea that began as a question on a hillside above Hong Kong, driven by the desire to address customer complaints about disappearing positions. As traditional finance recognizes the benefits of this financial product, its impact is likely to be impressive.