The Groundbreaking Story of How a Hong Kong Hike Revolutionized Crypto Trading

The concept of the perpetual swap, also known as a perpetual future or 'perp,' was conceived in 2015 on a hiking trail in Hong Kong. Ben Delo, a mathematician and co-founder of BitMEX, was discussing a problem that had been bothering him for months with a friend named Bavik, a derivatives trader. At the time, BitMEX was experimenting with various types of futures contracts, including quarterly, monthly, weekly, 48-hour, and even 24-hour contracts, but none of them were working as intended. Customers were complaining that their positions were being closed without warning, and they wanted a product that resembled spot trading but offered the leverage that only a derivatives exchange could provide. Delo asked, 'What if a future never expired?' Bavik's response was immediate: 'Mathematically, it would be worth infinity.' Although technically correct, this presented a problem. The solution Bavik proposed was to charge traders the bitcoin overnight rate, similar to how LIBOR is used in traditional finance. However, Delo realized that such a rate did not exist at the time. Undeterred, Delo decided to create it, which led to the invention 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 in the world. When Delo and Arthur Hayes founded the exchange in 2014, they were targeting institutional hedgers, not retail traders chasing 100x leverage. Hayes had previously worked at Deutsche Bank, while Delo had spent years developing high-frequency trading systems at JP Morgan. Their goal was to provide professional infrastructure for bitcoin miners and payment companies to hedge their exposure. The institutions never materialized, but instead, sophisticated retail traders emerged, seeking to speculate with high leverage. BitMEX adapted, offering 100x leverage by Halloween 2015, made possible by a real-time margining system that Delo had built from scratch. The issue with futures contracts, even those with short durations, was the basis – the premium at which a futures contract trades above the spot price of the underlying asset. This concept was poorly understood in the crypto space in 2015. Customers would often ask why bitcoin was more expensive on BitMEX, and the response would be to short it, which confused many. BitMEX continued to shorten the expiry of its listed futures contracts, but customers still struggled to understand why their positions were being closed. The solution came from Delo's conversation on the hiking trail, which provided the framework for a leveraged product that never expired. The perpetual swap launched in May 2016 with a straightforward mechanic: 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. Initially, the funding rate was derived from third-party lending markets, but as bitcoin's price rose in 2016 and 2017, the mechanism became overwhelmed. The swap started trading at a persistent premium to spot, causing the contract price to drift away from the actual price of bitcoin. Delo had to dynamically adjust the funding rate calculation, replacing the fixed reference point with a dynamic one that looked inward at how the swap was trading on BitMEX. The solution involved measuring the gap between the swap and spot over an eight-hour window, treating it as an implied basis, and back-calculating the annualized rate from it. This rate would then be charged at the end of the next eight-hour window, providing market makers with notice and creating a dynamic equilibrium. This funding rate mechanism is now used by every major derivatives exchange in the world. By 2017, BitMEX had become the most liquid bitcoin market, processing $3-4 billion daily, with the perpetual swap at its core. Price discovery for bitcoin was happening on the BitMEX order book, not on Coinbase or Bitstamp. The concentration of liquidity was a result of the swap's design, which collapsed multiple contracts into one instrument. Competitors took notice, with some copying the concept more successfully than others. Today, every major exchange in crypto offers its own perpetual swap, built on the funding rate architecture that Delo developed. BitMEX chose not to patent the perpetual swap, focusing instead on building and innovating. The market's response has been overwhelming, with the product now attracting the attention of traditional finance regulators. The CFTC is reportedly making room for perpetual swaps under its framework, and there is speculation that the CME could eventually list them on equities. For Delo, this is the ultimate validation of an idea that started as a question on a hillside above Hong Kong, asked by someone who had grown tired of watching customers struggle with disappearing positions. As traditional finance recognizes the benefits of this financial product, its impact will be impressive.