How a Hong Kong Hike Revolutionized Crypto Trading

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, a mathematician and co-founder of BitMEX, was discussing a problem with a friend, Bavik, a derivatives trader. They were trying to find a solution to the issue of futures contracts expiring too quickly, causing customer positions to close without warning. Delo asked, "What if a future never expired?" Bavik's response was that it would be mathematically worth infinity, but he suggested charging traders the bitcoin overnight rate to solve the problem. Delo built the product, and it became one of the most significant financial innovations of the 21st century. BitMEX was initially designed for institutional hedgers, but it ended up attracting retail traders who wanted to speculate with high leverage. The exchange offered 100x leverage, which was made possible by a real-time margining system. The issue with futures contracts was the basis, the premium at which a futures contract trades above the spot price of the underlying asset. BitMEX kept shortening the expiry of its listed futures contracts, but customers still complained about their positions closing without warning. Delo's conversation on the hiking trail gave him the framework to build a leveraged product that never expired. The perpetual swap launched in May 2016, with a daily funding rate that anchored the contract to the spot price. The early funding rate was derived from third-party lending markets, but it was later replaced with a dynamic approach that looked inward at how the swap was trading. The solution was elegant, and it gave market makers notice of how the funding rate was calculated. This mechanism is now used by every major derivatives exchange in the world. By 2017, BitMEX was the most liquid bitcoin market, processing $3-4 billion a day. The perpetual swap was at the center of it all, and price discovery for bitcoin was happening on the BitMEX order book. Competitors noticed, and soon every major exchange in crypto offered its own perpetual swap. Delo believes that the product's success is a testament to its financial innovation, and he expects it to continue to grow in the future.