How a Hong Kong Hike Revolutionized Crypto Trading Forever

The concept of the perpetual swap, also known as a perpetual future or 'perp,' 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 his friend Bavik, a derivatives trader. BitMEX had been experimenting with various types of futures contracts, but none of them seemed to be working. Customers were complaining that their positions were closing without warning, and they wanted a product that could offer them the leverage of a derivatives exchange while still feeling like a spot trade. Delo asked, 'What if a future never expired?' Bavik's response was that it would be mathematically worth infinity. However, he also suggested a solution: charge traders the bitcoin overnight rate. The problem was that this rate did not exist at the time. Delo decided to build it, and in doing so, he invented one of the most significant financial products of the 21st century. The perpetual swap was launched in May 2016, and it quickly became a game-changer in the world of crypto trading. The product allowed traders to buy and sell bitcoin with leverage, without the need for an expiry date. The swap was anchored to the spot price through a daily funding rate, which was initially derived from third-party lending markets. However, as the demand for long exposure on BitMEX increased, the funding mechanism had to be adjusted to prevent the contract price from drifting away from the actual price of bitcoin. The solution was to look inward at how the swap was trading, rather than outward at external lending markets. The exchange began measuring the gap between the swap and the spot price over an eight-hour window and using that to calculate the funding rate. This dynamic equilibrium allowed market makers to anchor the swap back down to the spot price, creating a more stable and liquid market. The perpetual swap was a huge success, and it quickly became the most liquid bitcoin market in the world. By 2017, BitMEX was processing $3-4 billion a day, and the perpetual swap was at the center of it all. The product's design allowed for the consolidation of liquidity, resulting in a more liquid market with tighter spreads. Competitors took notice, and soon every major exchange in crypto was offering its own perpetual swap. The product's success has been staggering, with some estimates suggesting that it now does $40-50 trillion dollars a year in turnover. The perpetual swap has also attracted the attention of traditional finance regulators, with the CFTC reportedly making room for it under its framework. For Delo, the prospect of traditional finance embracing the perpetual swap is the final validation of a product that started as a question on a hillside above Hong Kong.