The Genesis of a Crypto Trading Revolution: How a Hong Kong Hike Changed Everything

In 2015, on a hiking trail in Hong Kong, the concept of the perpetual swap was born. 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 customers were consistently complaining about their positions being closed without warning. They wanted a product that combined the benefits of spot trading with the leverage of derivatives. Delo's friend suggested a contract with no expiration date, but Delo was unsure how to make it work. The solution involved charging traders an overnight rate, similar to the way traditional finance charges LIBOR. However, Delo realized that such a rate did not exist for bitcoin, so he decided to create it. This innovation would go on to become one of the most significant financial products of the 21st century. When Delo and Arthur Hayes founded BitMEX in 2014, they envisioned an exchange for institutional hedgers, not retail traders. However, the market had other plans. By Halloween 2015, the exchange was offering 100x leverage, thanks to a real-time margining system built by Delo. The perpetual swap, launched in May 2016, was a game-changer. It allowed traders to buy and sell bitcoin with leverage, without the need for expiration dates. The core mechanic 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 it soon became clear that a more dynamic approach was needed. Delo developed a new method, looking inward at how the swap was trading rather than outward at external markets. This solution, which measured the gap between the swap and spot prices over an eight-hour window, became the standard for the industry. By 2017, BitMEX was the most liquid bitcoin market in the world, processing $3-4 billion a day. The perpetual swap was at the center of it all, with price discovery happening on the BitMEX order book. The concentration of liquidity was a direct result of the swap's design, which collapsed multiple contracts into one instrument. Competitors took notice, and soon every major exchange in crypto was offering its own perpetual swap. Delo believes that the fact that every other exchange has copied the swap is a testament to its financial innovation. He estimates that the perpetual swap now generates $40-50 trillion in turnover each year, making it one of the most successful products in the history of capitalism. Looking to the future, Delo is excited about the prospect of traditional finance embracing the perpetual swap. 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 would be the final validation of a product that started as a question on a hillside above Hong Kong.