How a Hong Kong Hike Revolutionized Crypto Trading Forever

In 2015, Ben Delo, co-founder of BitMEX, embarked on a hike in Hong Kong with a friend, Bavik, a derivatives trader. During their walk, Delo was pondering a problem that had been plaguing him for months. BitMEX had been experimenting with various types of futures contracts, but customers were consistently complaining about their positions closing without warning. They wanted a product that mimicked 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 mathematically worth infinity. However, he suggested charging traders the bitcoin overnight rate to solve the issue. Delo built the product, and in doing so, invented one of the most significant financial products of the 21st century. The perpetual swap was born, and it would go on to revolutionize the crypto trading landscape. Initially, BitMEX was designed for institutional hedgers, but it ended up attracting retail traders who wanted to speculate with high leverage. The exchange offered 100x leverage, made possible by a real-time margining system built by Delo. The issue with futures contracts was the basis, 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, it caused confusion. BitMEX's customers were perplexed by the high price of bitcoin on the exchange, and they didn't understand why they couldn't short it. Delo's conversation with Bavik on the hiking trail provided the framework to build a product that addressed these issues. The perpetual swap launched in May 2016, and its core mechanic 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. 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 external markets. The solution was elegant, and it gave market makers notice of how the funding rate was calculated. This 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 product's design led to a concentration of liquidity, making it a more liquid market with tighter spreads. 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 is a testament to its financial innovation. He estimates that the product now does $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, instead focusing on building and improving the product. Now, a decade on, the product is attracting the attention of traditional finance regulators, with the CFTC reportedly making room for perpetual swaps under its framework. Delo sees this as the final validation of the product, and he believes that once traditional finance recognizes its benefits, it will be impressive.