The Birth of a Revolutionary Trading Concept: How a Hong Kong Hike Changed Crypto Forever

In 2015, a pivotal conversation on a Hong Kong hiking trail between Ben Delo, co-founder of BitMEX, and his friend Bavik, a derivatives trader, laid the groundwork for the perpetual swap, a financial innovation that would alter the landscape of crypto trading. Delo was grappling with the challenge of creating a product that would meet the demands of BitMEX's customers, who were seeking a derivative that could provide the leverage of traditional futures contracts but without the constraints of expiration dates. The breakthrough came when Delo posed a question to Bavik: "What if a future never expired?" Bavik's response, "Mathematically, it would be worth infinity," sparked an idea that would eventually become the perpetual swap. However, a critical issue arose - how to charge traders for the privilege of holding a position in a contract that theoretically had no end date. The solution involved charging traders an overnight rate, akin to the LIBOR in traditional finance, but tailored to the bitcoin market. This concept, though simple in principle, required the creation of a bitcoin overnight interest rate, which did not exist at the time. Undeterred, Delo set out to build it, thereby inventing one of the most consequential financial products of the 21st century. The journey of BitMEX, from its inception to its current status as a pioneer in the crypto derivatives market, is a testament to innovation and the relentless pursuit of solving complex financial problems. The perpetual swap, launched in May 2016, was a straightforward yet ingenious concept - a futures contract with no expiry date, anchored to the spot price through a daily funding rate. This mechanism allowed longs and shorts to interact in a dynamic equilibrium, with the funding rate acting as a balancing force. Initially derived from third-party lending markets, the funding rate eventually evolved into a dynamic, inward-looking mechanism that measured the gap between the swap and spot prices, back-calculating an implied basis and annualized rate. This solution not only addressed the issues faced by early adopters of the perpetual swap but also set a standard for the industry, with every major derivatives exchange eventually adopting a similar funding rate architecture. The impact of the perpetual swap has been profound, with BitMEX becoming the most liquid bitcoin market by 2017, processing billions of dollars daily. The concentration of liquidity into a single instrument - the perpetual swap - contributed to tighter spreads and a more liquid market. The success of the perpetual swap has also attracted the attention of traditional finance regulators, with the CFTC reportedly considering a framework that would accommodate such products. For Delo, the potential for the perpetual swap to be listed on traditional exchanges like the CME represents the ultimate validation of an idea born from a conversation on a Hong Kong hiking trail. As traditional finance begins to recognize the benefits of this financial innovation, it may mark the beginning of a new era in trading, one that blurs the lines between crypto and traditional markets.