How a Hong Kong Hike Led to a Game-Changing Innovation in Crypto Trading

In 2015, on a hiking trail in Hong Kong, the concept of a perpetual swap, also known as a perpetual future, was born. Ben Delo, co-founder of BitMEX, was discussing a problem with his friend Bavik, a derivatives trader, that had been troubling him for months. BitMEX had tried various types of futures contracts, but customers kept complaining about positions closing unexpectedly. They wanted a product that resembled spot trading but offered the leverage of derivatives. Delo asked, "What if a future never expired?" Bavik replied that mathematically, it would be worth infinity. However, he suggested charging traders the bitcoin overnight rate to solve the issue. Delo built the product, inventing one of the most significant financial products of the 21st century. Initially, BitMEX was designed for institutional hedgers, but it ended up attracting retail traders who wanted to speculate with high leverage. The exchange offered 100x leverage by Halloween 2015, thanks to Delo's real-time margining system. The issue with futures contracts was the basis, the premium at which a contract trades above the spot price. Customers were confused, and BitMEX tried to educate them. The perpetual swap, launched in May 2016, was 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 later became dynamic, looking inward at how the swap was trading. This solution, known as the funding rate mechanism, is now used by every major derivatives exchange. By 2017, BitMEX was the most liquid bitcoin market, processing $3-4 billion daily, with the perpetual swap at its center. The product's success led to competitors copying it, and now every major exchange in crypto offers its own perpetual swap. Delo believes the product's success is a testament to its financial innovation, with an estimated $40-50 trillion in annual turnover. The perpetual swap is now attracting the attention of traditional finance regulators, with the potential for it to be listed on equities in the future.