How a Chance Encounter on a Hong Kong Hike Revolutionized Crypto Trading

The concept of the perpetual swap, also known as a perpetual future or 'perp,' was conceived on a hiking trail in Hong Kong in 2015. Ben Delo, BitMEX co-founder and a mathematician, was discussing a persistent problem with a friend, Bavik, a derivatives trader. BitMEX had experimented with various futures contracts, but customers continually complained about positions closing without warning. They wanted a product that combined the benefits of spot trading with the leverage of derivatives. Delo asked, 'What if a future never expired?' Bavik's response was that it would be mathematically worth infinity, as the value of a futures contract is partly derived from its time to expiry and carrying cost. However, Bavik suggested charging traders the bitcoin overnight rate to address this issue. The problem was that this 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 becoming the most liquid bitcoin market. 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 wanted to speculate with high leverage, which BitMEX accommodated by introducing 100x leverage by Halloween 2015. The exchange's real-time margining system, built by Delo, made this possible. The issue with futures contracts, even those with short expiration dates, was the basis – the premium at which a futures contract trades above the spot price of the underlying asset. This concept was not well understood in the crypto space at the time. Customers would often ask why bitcoin was more expensive on BitMEX, and the exchange would explain that it was due to the implied interest rate. The introduction of the perpetual swap in May 2016 marked a significant turning point. The core mechanism was straightforward: 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. Initially, the funding rate was derived from third-party lending markets, but this approach had limitations. As bitcoin's price rose in 2016 and 2017, demand for long exposure overwhelmed the funding mechanism, causing the swap to trade at a persistent premium to spot. Delo and his team had to dynamically adjust the funding rate calculation to address this issue. The solution involved looking inward at how the swap was trading on BitMEX, rather than relying on external lending markets. The exchange began measuring the gap between the swap and spot prices over an eight-hour window, treating this gap as an implied basis, and back-calculating the annualized rate from it. This dynamic equilibrium allowed market makers to anchor the swap back to the spot price. By 2017, BitMEX had become the most liquid bitcoin market, processing $3-4 billion in daily transactions, with the perpetual swap at its core. 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, and soon every major exchange in crypto offered its own perpetual swap, built on the funding rate architecture that Delo had developed. The fact that the perpetual swap has been copied by other exchanges is a testament to its financial innovation. Delo believes that traditional finance will eventually recognize the benefits of this product, leading to further adoption and growth. 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 represents the final validation of an idea that started as a question on a hillside above Hong Kong, driven by a desire to address his customers' complaints about disappearing positions.