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

In 2015, during a hike in Hong Kong, the concept of the perpetual swap, also known as a perpetual future or 'perp,' was conceived. Ben Delo, BitMEX's co-founder and a mathematician, was discussing a persistent problem with a friend named Bavik, a derivatives trader. BitMEX had experimented with various futures contracts, including quarterly, monthly, weekly, 48-hour, and 24-hour contracts, but none had succeeded. Customers complained about their positions being closed without warning, seeking a product that resembled spot trading but offered the leverage of a derivatives exchange. Delo asked, 'What if a future never expired?' Bavik replied, 'Mathematically, it would be worth infinity.' Although technically correct, Bavik suggested charging traders the bitcoin overnight rate, similar to LIBOR in traditional finance. However, Delo was unsure what that rate was, so he decided to create it. This innovation would become one of the most significant financial products of the 21st century. To understand the perpetual swap's impact, it's essential to grasp what BitMEX aimed to achieve before becoming the world's most liquid bitcoin market. Founded in 2014 by Delo and Arthur Hayes, the exchange targeted institutional hedgers, but instead, it attracted sophisticated retail traders seeking speculation with high leverage. By Halloween 2015, BitMEX offered 100x leverage, thanks to Delo's real-time margining system. The issue with futures contracts was the basis, the premium at which a futures contract trades above the underlying asset's spot price. In traditional finance, this is well understood, but in crypto, it caused confusion. BitMEX's customers struggled to comprehend why bitcoin was more expensive on the exchange and why they could short it. The perpetual swap, launched in May 2016, addressed these issues with a straightforward mechanism: 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. Initially, the funding rate was derived from third-party lending markets, but as bitcoin's price rose, the mechanism was overwhelmed. Delo dynamically adjusted the funding rate, replacing the fixed reference point with a dynamic one that looked inward at the swap's trading activity. This solution, which measured the gap between the swap and spot prices over an eight-hour window, was elegant and effective. The funding rate mechanism has since been adopted by every major derivatives exchange. By 2017, BitMEX was the most liquid bitcoin market, processing $3-4 billion daily, with the perpetual swap at its core. The product's design concentrated liquidity, allowing market makers to consolidate their capital into one instrument. Competitors noticed, and soon every major exchange in crypto offered its own perpetual swap, built on Delo's funding rate architecture. BitMEX chose not to patent the perpetual swap, focusing on building instead. Now, a decade later, the product is attracting traditional finance regulators' attention, with the CFTC reportedly making room for perpetual swaps under its framework. For Delo, this prospect is the final validation of a concept born on a Hong Kong hillside, asked by someone tired of watching customers complain about disappearing positions.