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

In 2015, a hike in Hong Kong's countryside sparked an idea that would revolutionize the crypto trading landscape. Ben Delo, BitMEX's co-founder and a mathematician by training, was discussing a problem with his friend Bavik, a derivatives trader. The issue at hand was finding a solution to the limitations of traditional futures contracts, which were not meeting the needs of BitMEX's customers. Delo and his team had tried various approaches, including quarterly, monthly, weekly, and even 24-hour futures contracts, but none had provided the desired outcome. Customers were complaining about positions closing without warning, and the team was struggling to find a way to offer the leverage and flexibility that traders desired. The breakthrough came when Delo asked, 'What if a future never expired?' Bavik's response, 'Mathematically, it would be worth infinity,' set Delo on a path to create a new financial product. The concept of a perpetual swap, also known as a perpetual future or 'perp,' was born. The perp was designed to mimic the characteristics of a spot trade but with the leverage of a derivatives exchange. To make it work, Delo built a system that would charge traders an overnight rate, similar to the LIBOR rate used in traditional finance. However, there was a problem - the bitcoin overnight rate did not exist at the time. Undeterred, Delo created it, laying the foundation for one of the most influential financial products of the 21st century. The perpetual swap launched in May 2016, with a core mechanic that was straightforward: 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. The early funding rate was derived from third-party lending markets, but as Bitcoin's price rose, the mechanism struggled to keep up. Delo and his team had to dynamically adjust the funding rate to ensure the contract price remained aligned with the actual price of bitcoin. The solution they developed, which looked inward at how the swap was trading rather than outward at external markets, has become the standard for the industry. Today, every major derivatives exchange in the world uses a funding rate mechanism similar to the one Delo created. The impact of the perpetual swap has been profound, with BitMEX becoming the most liquid bitcoin market in the world. The exchange's success has also attracted the attention of traditional finance regulators, with the CFTC reportedly making room for perpetual swaps under its framework. As Delo looks to the future, he believes that the perpetual swap will continue to play a major role in shaping the world of finance, and that its adoption by traditional finance will be a testament to the power of innovation in the crypto space.