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

The concept of the perpetual swap, also known as a perpetual future, was conceived in 2015 on a hiking trail in Hong Kong. Ben Delo, BitMEX co-founder and mathematician, was discussing a persistent issue with a friend, Bavik, a derivatives trader. BitMEX had experimented with various futures contracts, but customers consistently complained about their positions being closed without warning. They desired a product that resembled spot trading but offered the leverage of a derivatives exchange. Delo posed a question: what if a future never expired? Bavik's response was that it would theoretically be worth infinity, due to the compounding carrying cost. However, he suggested charging traders the bitcoin overnight rate to address this. Delo built this concept into a product, inventing one of the most significant financial products of the 21st century. Initially, BitMEX targeted institutional hedgers, but it was retail traders who ultimately drove the demand. By offering 100x leverage, made possible by a real-time margining system, the exchange attracted a different clientele. The issue with traditional futures contracts was the basis premium, which confused many in the crypto space. The perpetual swap, launched in May 2016, was designed to address this. It introduced a daily funding rate, where longs paid shorts or vice versa, depending on the swap's price relative to the spot price. The early funding rate was derived from external lending markets but was later adjusted dynamically based on the swap's trading activity. This solution allowed market makers to anchor the swap's price back to the spot price, creating a dynamic equilibrium. The perpetual swap's success was unprecedented, with BitMEX becoming the most liquid bitcoin market by 2017. Competitors took notice, and every major exchange in crypto eventually offered its own perpetual swap. The product's impact extends beyond the crypto space, with traditional finance regulators and institutions taking notice. The CFTC is reportedly making room for perpetual swaps, and there is speculation about the CME listing them on equities. For Delo, this is the ultimate validation of a concept that began as a question on a Hong Kong hillside.