In 2015, a hike in Hong Kong's countryside became the unlikely catalyst for a groundbreaking concept in cryptocurrency trading. Ben Delo, BitMEX's co-founder and a skilled mathematician, was accompanied by Bavik, a derivatives trader, as they pondered a persistent problem. Despite experimenting with various futures contracts, including quarterly, monthly, weekly, and even 24-hour contracts, customers continued to express frustration over positions closing without warning. They sought a product that combined the benefits of spot trading with the leverage of derivatives, but without the constraints of fixed expiration dates.
Delo posed a question: 'What if a future never expired?' Bavik's response was immediate: 'Mathematically, it would be worth infinity.' Although technically correct, this response sparked an idea. By charging traders an overnight rate, similar to LIBOR in traditional finance, Delo could create a sustainable model. However, he soon realized that a bitcoin overnight interest rate did not exist, prompting him to devise one.
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's success. Initially, the exchange targeted institutional hedgers, but it was retail traders who ultimately drove its growth.
By offering 100x leverage and a real-time margining system, BitMEX catered to these traders' demands. The perpetual swap, launched in May 2016, revolutionized the market by providing a futures contract with no expiry date, anchored to the spot price through a daily funding rate.
This mechanism allowed longs and shorts to interact dynamically, with BitMEX taking no cut. The funding rate, derived from third-party lending markets, was later replaced by a dynamic approach that looked inward at the swap's trading activity. This adjustment ensured that the contract price remained aligned with the actual price of bitcoin. The perpetual swap's impact on the crypto market was profound.
By 2017, BitMEX had become the most liquid bitcoin market, processing $3-4 billion daily. The swap's design concentrated liquidity, creating a more liquid market with tighter spreads. Competitors took notice, and soon every major exchange in crypto offered its own perpetual swap, built on the funding rate architecture that Delo had pioneered.
With the perpetual swap now attracting the attention of traditional finance regulators, Delo's innovation is on the cusp of broader recognition. The CFTC is reportedly making room for perpetual swaps under its framework, and speculation surrounding the CME's potential listing of these products on equities continues to grow. For Delo, this prospect represents the ultimate validation of a concept that began as a question on a Hong Kong hillside, driven by a desire to address his customers' frustrations and create a better trading experience.