In 2015, a hike in Hong Kong's countryside marked the birth of the perpetual swap, a revolutionary concept in crypto trading. Ben Delo, BitMEX's co-founder and a skilled mathematician, was discussing a persistent problem with his friend Bavik, a derivatives trader.
BitMEX had experimented with various futures contracts, but customers kept complaining about their positions closing unexpectedly. They wanted a product that resembled spot trading but offered the leverage of derivatives.
Delo asked, "What if a future never expired?" Bavik's response was immediate: "Mathematically, it would be worth infinity." Although technically correct, this idea presented a challenge. The solution involved charging traders an overnight rate, similar to LIBOR in traditional finance.
However, Delo soon realized that such a rate did not exist for Bitcoin. Undeterred, he decided to create it. This innovation would go on to become one of the most significant financial products of the 21st century.
The story of BitMEX's rise to prominence is inextricably linked to the perpetual swap. Founded in 2014 by Delo and Arthur Hayes, the exchange initially targeted institutional hedgers. However, it was retail traders who ultimately drove the platform's growth.
By offering 100x leverage and a real-time margining system, BitMEX catered to these traders' needs. The perpetual swap, launched in May 2016, was a game-changer.
This futures contract with no expiry date was anchored to the spot price through a daily funding rate. The mechanism allowed longs and shorts to interact dynamically, with BitMEX taking no cut.
The early funding rate was derived from third-party lending markets but eventually became self-sustaining. As Bitcoin's price rose in 2016 and 2017, demand for long exposure on BitMEX surged, causing the swap to trade at a premium to spot.
To address this, Delo introduced a dynamic funding rate, which looked inward at the swap's trading activity rather than relying on external lending markets. This solution, now widely adopted, created a dynamic equilibrium that maintained the contract's price close to the spot price.
By 2017, BitMEX had become the most liquid Bitcoin market, with the perpetual swap at its core. The exchange's daily turnover reached $3-4 billion, and price discovery for Bitcoin shifted from traditional exchanges to the BitMEX order book. 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.
Delo's innovation has attracted the attention of traditional finance regulators, with the CFTC reportedly making room for perpetual swaps under its framework. As the perpetual swap continues to evolve, its impact on the world of finance will only continue to grow.