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 was conceived. Ben Delo, co-founder of BitMEX and a mathematician, was discussing a problem with a friend, Bavik, a derivatives trader. BitMEX had tried various futures contracts, but customers were unhappy with positions closing unexpectedly. 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 replied that it would be mathematically worth infinity, but suggested charging traders the bitcoin overnight rate. Delo built this concept, inventing a pivotal 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. Founded in 2014 by Delo and Arthur Hayes, the exchange targeted institutional hedgers. However, instead of institutions, sophisticated retail traders arrived, 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 they traded above the spot price. This confused many in crypto. Customers complained about bitcoin being expensive on the exchange, not understanding that they could short it. BitMEX shortened the expiry of its futures contracts, but customers still struggled to comprehend. The perpetual swap, launched in May 2016, was a futures contract with no expiry date, anchored to the spot price through a daily funding rate. Initially, the funding rate was derived from third-party lending markets but later became dynamic, looking inward at how the swap was trading. This 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, collapsing multiple contracts into one instrument. Competitors noticed, and the perpetual swap is now offered by every major exchange in crypto. Delo believes the product's success, with $40-50 trillion in annual turnover, is a testament to its innovation. BitMEX chose not to patent the perpetual swap, focusing on building instead. Now, traditional finance regulators are taking notice, and the product may eventually be listed on equities.