How a Hong Kong Hike Revolutionized Crypto Trading Forever

In 2015, during a hike in Hong Kong, the concept of the perpetual swap was born. Ben Delo, BitMEX co-founder and mathematician, was discussing a problem with a friend, Bavik, a derivatives trader. BitMEX had tried various futures contracts, but customers complained about 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 replied that it would be worth infinity mathematically. However, he suggested charging traders the bitcoin overnight rate to solve the issue. Delo built this concept, inventing a groundbreaking financial product. To understand the significance of the perpetual swap, it's essential to consider what BitMEX aimed to be before becoming the most liquid bitcoin market. Founders Delo and Arthur Hayes focused on institutional hedgers, but instead, they 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 was basis, the premium at which a futures contract trades above the spot price. In traditional finance, this is well understood, but in crypto, it caused confusion. Customers complained about bitcoin being expensive on the exchange, and Delo explained that they could short it. BitMEX shortened the expiry of its listed futures contracts, but customers still struggled to understand. The hiking trail conversation gave Delo the framework to build a leveraged product that never expired. The perpetual swap launched in May 2016, with a daily funding rate anchoring it to the spot price. 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 it eventually became dynamic, looking inward at how the swap was trading. This solution was elegant, as it gave market makers notice of how the rate was calculated, allowing them to anchor the swap back to the spot price. This funding rate mechanism is now used 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 center. The concentration of liquidity was a result of the swap's design, consolidating market maker capital into one instrument. Competitors noticed, and eventually, every major exchange in crypto offered its own perpetual swap. Delo believes that the fact that every other exchange has copied the swap proves its financial innovation. The product is now attracting traditional finance regulators' attention, with the CFTC reportedly making room for perpetual swaps under its framework. For Delo, this is the final validation of a concept that started as a question on a hillside above Hong Kong.