How a Hong Kong Hike Revolutionized Crypto Trading

The concept of the perpetual swap, also known as a perpetual future, was conceived in 2015 on a hiking trail in Hong Kong. Ben Delo, co-founder of BitMEX and a mathematician, was discussing a problem with his friend Bavik, a derivatives trader. BitMEX had been experimenting with various futures contracts, but customers were consistently complaining about their positions being closed without warning. 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 to resolve the issue. However, Delo realized that this rate did not exist, so he decided to create it. This marked the beginning of one of the most significant financial products 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. Founders Delo and Arthur Hayes aimed to provide a platform for institutional hedgers, but instead, they attracted sophisticated retail traders seeking high leverage and speculation. By Halloween 2015, BitMEX was offering 100x leverage, thanks to a real-time margining system built by Delo. The issue with futures contracts was the basis, which confused many in the crypto space. BitMEX's customers struggled to understand why bitcoin prices were higher on the exchange, and the company tried to explain that it was due to the implied interest rate. The perpetual swap, launched in May 2016, was designed to address these issues. It 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 it eventually became dynamic, looking inward at how the swap was trading. This approach allowed market makers to understand how the funding rate was calculated and when it would be charged, creating a dynamic equilibrium. The perpetual swap became a huge success, and by 2017, BitMEX was the most liquid bitcoin market, processing $3-4 billion daily. The product's design concentrated liquidity, making it more attractive to traders. Competitors took notice, and soon every major exchange in crypto offered its own perpetual swap. Delo believes that the fact that other exchanges have copied the swap is a testament to its financial innovation. He estimates that the product now generates $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. Now, traditional finance regulators are taking notice, and there is speculation that the CME could eventually list perpetual swaps on equities. For Delo, this is the ultimate validation of a product that started as a question on a hillside in Hong Kong.