The Genesis of a Revolutionary Trading Concept: How a Hong Kong Hike Paved the Way for Crypto's Future

In 2015, a hike in Hong Kong's countryside marked the inception of the perpetual swap, a concept that would forever alter the landscape of crypto trading. Ben Delo, BitMEX's co-founder and a mathematician by training, was grappling with a persistent issue alongside his friend Bavik, a derivatives trader. Despite experimenting with various futures contracts, including quarterly, monthly, weekly, and even 24-hour contracts, customers continued to express frustration over unforeseen position closures. They yearned for a product that combined the benefits of spot trading with the leverage offered by derivatives exchanges. Delo's query, "What if a future never expired?" sparked a pivotal conversation. Bavik's response, "Mathematically, it would be worth infinity," highlighted the theoretical implications. However, he also proposed a solution: charging traders the bitcoin overnight rate, akin to LIBOR in traditional finance. This idea laid the groundwork for one of the most significant financial innovations of the 21st century. The perpetual swap, launched in May 2016, introduced a novel mechanism where longs paid shorts, or vice versa, based on the swap's price relative to the spot price. Initially, the funding rate was derived from external lending markets but was later adapted to a dynamic, inward-looking approach. This adjustment enabled the exchange to measure the swap's premium to the spot price over an eight-hour window, calculating an implied basis and annualized rate. The solution proved elegant, as market makers could anticipate and respond to the funding rate, maintaining a dynamic equilibrium. By 2017, BitMEX had become the most liquid bitcoin market, with the perpetual swap at its core. The product's success prompted competitors to follow suit, and today, every major derivatives exchange in the world utilizes a similar funding rate mechanism. Delo's invention has not only revolutionized crypto trading but is also attracting the attention of traditional finance regulators, with the CFTC and CME considering the integration of perpetual swaps into their frameworks.