How a Chance Encounter on a Hong Kong Hike Revolutionized Crypto Trading Forever

The concept of the perpetual swap, also known as a perpetual future, was born in 2015 on a hiking trail in Hong Kong. Ben Delo, co-founder of BitMEX and a mathematician, was discussing a persistent problem with a friend named Bavik, a derivatives trader. At the time, BitMEX was experimenting with various futures contracts, including quarterly, monthly, weekly, and even 24-hour contracts, but none of them seemed to work. Customers were complaining that their positions were being closed without warning, and they wanted a product that resembled spot trading but offered the leverage of a derivatives exchange. Delo asked, "What if a future never expired?" Bavik's response was immediate: "Mathematically, it would be worth infinity." Although technically correct, this presented a challenge. The solution was to charge traders the bitcoin overnight rate, similar to how LIBOR is used in traditional finance. However, Delo soon realized that this rate did not exist, so he decided to create it. This marked the beginning of one of the most significant financial innovations of the 21st century. To understand the impact of the perpetual swap, it's essential to consider what BitMEX was trying to achieve before it became the most liquid bitcoin market in the world. Founded in 2014 by Delo and Arthur Hayes, the exchange aimed to provide a platform for institutional hedgers, such as bitcoin miners and payment companies, to manage their exposure. The founders, who had experience working at Deutsche Bank and JP Morgan, designed the exchange to resemble a Bloomberg terminal, using Reuters instruction codes. However, instead of attracting institutions, the exchange drew sophisticated retail traders who wanted to speculate with high leverage. BitMEX adapted to this demand, introducing 100x leverage by Halloween 2015, made possible by a real-time margining system built by Delo. The issue with futures contracts, even those with short expiration dates, was the basis – the premium at which a futures contract trades above the spot price of the underlying asset. This concept was unfamiliar to many in the crypto space at the time. Customers would often ask why bitcoin was more expensive on BitMEX, and the response would be to short it, which was a foreign concept to many. The perpetual swap, launched in May 2016, addressed this issue 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, with BitMEX taking no cut. The early funding rate was derived from third-party lending markets, primarily Bitfinex. However, as bitcoin's price rose in 2016 and 2017, demand for long exposure overwhelmed the funding mechanism, causing the swap to trade at a persistent premium to spot. To address this, BitMEX dynamically adjusted the funding rate, replacing the fixed reference point with a dynamic one that looked inward at how the swap was trading. The solution involved measuring the gap between the swap and spot over an eight-hour window, treating it as an implied basis, and back-calculating the annualized rate from it. This rate was then charged at the end of the next eight-hour window, creating a dynamic equilibrium. This funding rate mechanism is now used by every major derivatives exchange in the world. By 2017, BitMEX had become the most liquid bitcoin market, processing $3-4 billion daily, with the perpetual swap at its core. The concentration of liquidity was a direct result of the swap's design, which collapsed multiple contracts into one instrument. Competitors took notice, with some copying the concept more literally than others. Today, every major exchange in crypto offers its own perpetual swap, built on the funding rate architecture that Delo pioneered. The fact that other exchanges have copied the swap is a testament to its financial innovation, with Delo estimating that it now facilitates $40-50 trillion in turnover annually, making it one of the most successful products in the history of capitalism. BitMEX chose not to patent the perpetual swap, focusing instead on building and improving the product. The market's response has been overwhelming, and now, a decade later, traditional finance regulators are taking notice. The CFTC is reportedly making room for perpetual swaps under its framework, and there is speculation that the CME could eventually list them on equities. For Delo, this is the final validation of an idea that started as a question on a hillside above Hong Kong, asked by someone tired of watching customers struggle with disappearing positions. As traditional finance begins to recognize the benefits of this financial product, Delo believes it will be truly impressive.